Pennsylvania Railroad v. Minis

⁴⁹⁸ Boyd, C. J., delivered the opinion of the Court, overruling a motion for reargument. A motion for a reargument in this case was filed, and a number of grounds supposed to be in support of it are stated in the brief, ^n the first place it is said that “A careful examination of the opinion of the Court has made it so entirely apparent to counsel of the appellees that, owing to the magnitude of the record and the shortness of time allowed for oral argument, this Court has fallen into such error as it will lie not unwilling to have an opportunity to correct, that we feel it a duty owing to this Court as well as to our clients to urge this motion.” If for the reasons assigned, or any other reason, the Court thought it had fallen into error in reaching the conclusion it did, it would not only be its duty, but its pleasure, to correct it, but if a reargument is to be granted because it is apparent to counsel for the losing parties that error has been committed by the Court, perhaps nine out of ten cases (certainly many of them) would have to he reargued. A day was allowed for the oral arguments, and no limit was fixed as to the length of the briefs. The original one of the appellees contained 254 pages, exclusive of an index of fifteen pages, and two tabulated statements, and one of fifteen pages was filed in reply to those of the appellants, which contained over eighty pages.

The Court had every opportunity, therefore, to understand the various points made by the respective counsel and the facts and authorities upon which they relied. It is true that the record was a large one^ but such parts of it. as reflected upon the questions involved were carefully read and considered. But the important question is whether the Court has fallen into error which in any way affected the result as announced. W e did not attempt in- the opinion to discuss at length every question suggested, because we did not deem it necessary, and the opinion was unusually lengthy, as it was, and we will not refer to every suggestion made in the brief now before us.

Anxious to correct any error that might be pointed out, which could possibly affect the result, we have carefully con ⁴⁹⁹ sidered tlie brief, but have failed to find anything material which had not already been urged by counsel for the appellees, and duly considered by us. If our conclusion was likely to have such dire results as suggested in the brief, affecting “not merely the interests of the plaintiffs, but the interests of all shareholders of subsidiary corporations, and the status of the administration of justice in this State,” it would, indeed, be unfortunate, and the mere suggestion makes us desirous of avoiding such results. It is true that the then recognized leader of the bar of Maryland (whose unfortunate death deprived us of the benefit of his argument) took part in making the defense relied on by the appellants, as is shown by the answer of the Northern Central Bailwa-y Company, signed by his firm, and by the examination of witnesses by him, and that other able and distinguished counsel argued the case in this Court, in support of the' lines of defense taken in the answers, but nevertheless if it is likely to be so disastrous, the responsibility would be upon this Court. The fundamental error in the appellees’ position is that ihey assume that, as the stock of the Union Company was in .1882 taken in the name of the Northern Central Company, and was paid for by that company, if it was in 1894 worth considerably more than $110.00 per share, at which price the 5,000 shares were sold to the P., W. & B., then the appellees, sis minority stockholders, have the right to ask a Court of Equity to set the sale aside, notwithstanding the circumstances shown.

Begardless of the fact that the sale by the directors was ratified by the stockholders in the way pointed out in the opinion, more than fifteen years prior to the filing of the bill (which we will refer to later), we can not admit that there is any equitable principle which would require a Court of Equity to set the sale aside on the mere ground that the stock was actually worth more, if that be conceded. It is true that directors must be honest in their dealings with the property under their control, and of course they can not give away the property of the company, as the appellees say Ihey in effect did, but they are not required to-be either dis ⁵⁰⁰ honest or unjust for the benefit of the stockholders when they "deal with others. If the directors of the Northern Central had sold this stock, or any of it, to any company or individuals not connected with the Pennsylvania System, it would have been a gross fraud on that system. Whatever else may be said in reference to.the absolute ownership of the stock by the Northern Central, it can not be successfully denied in the face of this record that it was purchased through the instrumentality of the P. It.

It. Co., and was intended for the benefit of the companies composing its system at and about the city of Baltimore. That company had only recently acquired the controlling interest in the P., W. & B. Co., already owning most of the stock of the Baltimore and Potomac Company, and was preparing to develop the business which has since been developed, for which the Union road was certainly as desirable as it was for the Northern Central, unless the P., W. & B. and the B. & P. obtained another line. The annual report of the P. R. R. Co. of 1882, in speaking of the purchase, said: ‘'The acquisition of this line has largely tended to strengthen and improve the position of that company (Northern Central) in Baltimore, and gives your company the indirect control of the connecting link in that city between the Philadelphia, Wilmington & Baltimore, the Northern Central and the Baltimore and Potomac Railroads.” It would have been folly for that company to put this link in the name of the Northern Central, in which it did not own a majority of the stock, instead of in the name, of one of the other two, or in its own name, had it not been understood that the purchase was for the benefit of all.

It in point of fact furnished the most, if not all, of the money with which the Union stock was purchased, as it paid $642,612.00 of the $700,912.00 of the proceeds of stock sold by the Northern Central, which it issued in order to pay for that of the Union Company and other purposes. If those who negotiated and arranged the purchase in 1882 intended to place the stock beyond the reach and control of ⁵⁰¹ the other companies of the Pennsylvania Eailroad System, they were certainly not doing them justice, and their connection with that company of itself ought to he sufficient to show that there was no such intention or expectation. Mr. Eewcomer not only carried on the negotiations in Baltimore for the purchase in 1882, hut he was active and influential in the sale of the 5,000 shares to the P., W. & B. Eo one knew more of the entire transaction than he did, and he was in a position to intelligently inform the directors (of which he was one) of the circumstances under-which it was purchased and in whose interest. The directors knew that the P., W. & B. was furnishing over 41 per cent, of the earnings of the Union Company; that with the exception of a small per cent, it was furnishing all of the income that the Union Company had, excepting what the Eorthern Central was paying, which as holder of all the stock came back to it; they knew that the Eorthern Central had had the benefit of the stock for its own purposes, and had had a handsome income from it, which in a large part had come from the P., W. & B. for some years, and that it would still have a controlling interest in it at a net cost of $50,000.00; they knew that the traffic furnished by the P., W. & B. was annually increasing, and that it was of the utmost importance to retain its patronage, and probably by that time had learned something of what is seen in still later days, that railroads are liable to make radical changes and adopt entirely new routes — diverting their traffic from former ones.

Eo one can say that had it not been for the Act of 1906, prohibiting the construction of railroads in certain parts of Howard and Baltimore counties, much of the traffic over the Union road would not before this have been diverted, or that some route may not yet be adopted, in order to relieve the congestion and troubles incident to passing through a large city like Baltimore. In addition to all that the directors knew that the stock of the Union Company had no market value, for the simple reason that it could not be honestly sold to any company other than one or both of the other two in the Pennsylvania Eailroad ⁵⁰² System, or to that company itself, and that whatever value it had was dependent almost entirely upon the amount of traffic their own company and the P., W. & B. and the B. & P. furnished it. Taking all of those circumstances into consideration, together with others mentioned in the main opinion, it is difficult to understand how it can he so persistently and confidently asserted that the sale made by those directors was fraudulent, or even unjust to the minority stockholders. Discreet business men do not hesitate to sell an interest in their business at less than it may appear to be worth, if its value be estimated by the amount of business, to those who have furnished much of that business, in order to retain their patronage, and sometimes in order to do what is simply just and right, to give them some return for what they have done and are doing- — especially if under some moral, although no legal, obligation to do so.

If it be true that Mr. Brooks sold the stock of the Union Company for less than it' was worth, because Mr. Eewcomer and others had impressed upon him the dangers of another line, as the appellees intimate, no stockholder of the Canton Company, which owned it, would charge him with fraud, or even with the lack of business sagacity for selling it,- — although it was worth more. Yet the gentlemen who composed the Board of Directors of the Eorthern Central are charged with dishonesty (for that is what it means) because they did — not only what would simply be regarded as honest and just between individuals dealing under such circumstances, but what the plaintiffs and other stockholders might have condemned them for not doing, if such changes as railroads often make had been made, and the value of the Union Eoad had thereby been materially reduced. Of course we do not mean to say that directors are always at liberty to deal with their company’s property just as they could with their own, but we do say that when they have authority to sell some of its property, and it is simply a question of price which is to be fixed, they are not required to ignore all business principles which should, and ⁵⁰³ do control honest individuals in their dealings with each other and all equities which enter into the transaction. If they sell for less than the real value (even though it may he for more than their company paid and for more than it is carried on the books of the company) it may be that their action is subject to a close scrutiny of the Courts, but unless fraud be shown or the Courts can see that they in some way abused the confidence and trust placed in them by the stockholders, they have no right to interfere.

But if there could possibly be any question about the right of the directors to act as they did, there can be no question about the right of the stockholders to sell the 5,000 shares at the price it was sold for, unless they acted fraudulently. At their regular annual meeting they acted on the report of the president and directors and adopted and approved that report, which explicitly referred to the sale, and the reason for making it, and the report had been previously published in three newspapers in Baltimore and sent to each stockholder. Eor aught that appears in the record every stockholder present, as well as many others who were not present, may have known the terms of the sale (as well as the fact of the sale, which they must at least be presumed to have known), and the only person who was at the time a stockholder who testified that he did not know of the terms was Mr. Minis, who was then owner of fifty shares, and admitted he was in the habit at that time of giving his proxy to others. That meeting was a year after the directors had made the sale (the report being for the year 1894, during which the sale took place) and surely if the directors did their duty, as they are presumed to have done in the absence of evidence to the contrary, not only those who were present and took part in the proceedings when the sale was ratified by the board, but all of them not only knew of the fact of sale but of the terms, as no director, who discharged his duties as the law required him to do, could have remained ignorant of the facts for the whole year before the stockholders met, and surely if there was fraud in the sale there was at least one honest director ⁵⁰⁴ in the board who would have informed the minority stockholders.

But not one complaint is shown to have been made until sixteen years afterwards when this bill was filed, and at a time when the receipts of the Union road were vastly larger than they were in 1894, owing in a great measure to the traffic of the P., B. & W. But as we have said, the shareholders present did ratify the sale by their action on the report, and that action was binding on the minority present as well as absent, unless there was fraud, and fraud has not been proven. Under the principles of law announced in the former opinion that is in our judgment conclusive of the question. We confess our inability to understand the-position taken in this brief as to the answers of the defendants being overlooked by the Court. No principle of equity procedure is better established than that the plaintiff must recover on the allegations of his bill and the evidence, and not on the defects or averments of the answer, except admissions.

The plaintiffs distinctly charged in the bill that there was a sale, offered evidence to show that there was, and still so contend. Of course if exceptions are not filed to evidence, or it is not in some proper way objected to at the hearing, a decree may be based on the evidence alone, and under section 36 of'Article 5 of the Code the defendant can not on an appeal rely on the fact that the evidence was not admissible under the allegations of the bill, unless exceptions are filed to it