Ross Transport, Inc. v. Crothers

Marbury, C. J., delivered the opinion of the Court. This is a derivative suit by a stockholder of a Maryland corporation, acting on his own behalf as well as for other stockholders who might join and be made parties, brought after demand had been made on the corporation ⁵⁷⁶ to institute such a proceeding, which demand was neglected and refused. The original plaintiff was Charles T. Crothers, and he was subsequently joined by another stockholder, his brother Edmund W. Crothers, who was made an additional party plaintiff by order of Court. The defendants (appellants here) are the corporation, Ross Transport, Inc., Wallace Williams, F. DuPont Thomson, James W. Hughes and William B. Ross, directors, and Elizabeth B. Williams, Lois Williams Young and Corrine Williams, stockholders.

The purpose of the suit is to set aside the issuance of 40 shares of stock to Elizabeth B. Williams, 100 shares of stock to Corrine Williams, 100 shares of stock to Lois Williams Young and 125 shares of stock to William B. Ross. The defendants all answered, testimony was taken and the Court passed a decree granting the relief prayed, and directing the four stockholders named to repay to the corporation the dividends received by them on the stock declared to be illegally issued, and ordered cancelled. From this decree, all the defendants appealed. It appears from the record that the corporation was organized on January 19, 1942, to operate a fleet of buses to transport employees of Triumph Explosives, Inc., to and from its plant at Elkton, Maryland.

The incorporators were Wallace Williams, William B. Ross and Gervase R. Sinclair who later died. These three and F. DuPont Thomson and James W. Hughes were the directors. At the organization meeting of the directors, Williams was named as President and Ross as General Manager. The authorized stock was 5000 shares of no par value.

At the organization meeting a resolution was passed authorizing the sale of this stock at $20 a share, and providing that stock to the value of $30,000 be offered for sale. This limited the stock to be issued to 1500 shares. The stock records of the company showed the original subscriptions to stock, all in March and April, 1942, to be as follows: ⁵⁷⁷ March 25th—To Wallace Williams 50 shares “ “ Wallace Williams, Jr. 100 “ “ “ Elizabeth B. Williams 200 . “ “ “ Edmund W. Crothers 100 . “ “ ' “ William B. Ross 25 “ “ James W. Hughes 150 ' “ April 2nd “ F. DuPont Thomson 150 “ “ “ Bessie F. Whitelaw 10 April 20th “ Charles T. Crothers 50 “ April 27th “ Gervase R. Sinclair 50 “ “ “ Jean W. Sinclair 150 Total 1035 ... In the latter part of July, 1942, after the Meath of Mr. Sinclair, Charles T. Crothers purchased the Sinclair stock, 200 shares, at $20 and 5% interest from the date of issuance.

This did not, of course, increase the amount of stock outstanding. On August 26, 1942, the stock complained of was issued to the wife and daughters of Wallace Williams and to William B. Ross, totaling 365 shares in all, and increasing the outstanding stock to 1400 shares. All of this stock was issued at the set price of $20.00 a share. The stock issued to the Williams family was paid by Mr. Williams’ check for $4800.

Mr. Ross paid the company $2500 for his stock. As a result of these purchases by Williams and Ross the stock books showed that the Williams family had 590 shares, Ross had 150 shares, Hughes had 150 shares, Thomson had 150 shares, Whitelaw had 10 shares, Edmund W. Crothers had 100 shares and Charles T. Crothers had 250 shares. Williams and Ross, therefore, had the controlling interest in the company. Mr. Williams testified that all of the stock in the company was sold by him personally under the directors’ resolution.

He said that all the stock in dispute was definitely promised in the beginning, except 40 shares to Mrs. Williams. This, he said, he put in to round out an even 1400 shares, holding back 100 shares which he thought Hughes or Thom ⁵⁷⁸ son might like to take. He never called any other directors meeting to authorize any of the sales made after the original subscriptions and none of the other stockholders were given an opportunity to buy. He told Mr. Ross and Mr. Hughes how he was going to divide it.

Mr. Ross did not testify. The sale of this additional stock to a director and to the family of the president and director without any further authority than the original resolution, and without opportunity to buy given to other stockholders, is sought to be justified on the ground that it was originally planned, and that the money was needed to purchase additional buses at a cost of about $16,000. The facts, however, show no such need. The company was an immediate financial success.

It was engaged in a special business, of which it had a monopoly, and in which it could not help making money so long as Triumph Explosives continued to operate its large plant, employing the workmen the Transport Corporation hauled. The loan of $3000 by Triumph Explosives, made in March, was paid in June. The record shows the following figures during the first five months of its existence: Outstanding obligations Cash Surplus above liabilities on conditional sales and invested capital contract Bank balance April 25 $ 8,459.77 $50,372.22 $ 9,092.65 May 23 13,295.38 45,712.34 13.811.80 June 21 20,214.53 42,144.63 14,154.62 July 19 26,414.74 31,154.69 12.842.81 Aug. 16 25,057.73 28,997.68 8,970.83 On August 7th, the directors authorized salary payments dating back to February 1, 1942, $3915 to Mr. Williams, $2875 to Mr. Ross and $2025 to Mr. Hughes who was Secretary and Treasurer of the company which had started business a few months before with a paid in capital of $20,700, and which had bought its operating equipment, i.e., the buses, on conditional sales con ⁵⁷⁹ tracts, and had borrowed $3000 to pay for its licenses. Prosperity continued.

On November 27, 1942, a dividend of $5 a share was declared. On December 17, 1942, one of $15 (called a return of capital, but not authorized by the stockholders, Code, Article 23, Sec. 32). On the same date, another dividend of $5 a share was declared payable June 30, 1943. The defendants, Williams and Ross, who were operating the company, knew on August 26, 1942, that they were about to receive large sums in dividends in addition to the salaries they were getting.

The benefit of these dividends would not only increase the value of the stock, but the first two would pay back all the subscribers had invested, leaving any future earnings and distributions pure profit. Under these circumstances, they took the opportunity they thought they had to increase their investment, and in fact received in December the full amount they invested in August, leaving them with the additional stock on which to receive such further dividends as were obviously in sight. The appellants contend that the company was not in the claimed good financial condition in August, because no allowance had been made for income and profits taxes. But if we reduce the book surplus of $25,000 on August 16, 1942, by allowing for a 40% tax (the limit unless the earnings increased), we still find the company with a net surplus of $15,000, 75% of the original investment.

The stock had no “market value,” but it must be obvious that it was worth much more than $20 a share on August 26th. The appellees give two reasons for their contention that the stock sales of August 26th were void: First, because they deprive them and the other original stockholders of their pre-emptive rights to purchase a proportionate amount of the remaining shares, and, second, because, in selling to themselves and their nominees, Williams and Ross have abused their trust as officers and directors. They claim to be injured in two ways. Their voting powers have been proportionately lessened, and ⁵⁸⁰ the control of the company has passed to Williams and Ross.

And the amount paid in dividends has to be divided among 365 more shares of stock to the consequent financial loss of the holders of the original shares. Before discussing these legal questions, the outline of the case may be completed by quoting from the appellants’ brief certain facts about the plaintiffs (appellees) which appellants claim are pertinent. The original plaintiff, Charles T. Crothers, was an employee of the corporation as well as a stockholder. Edmund W. Crothers had no position in the corporation, but he furnished it part of the buses that were bought at the inception of the business.

The appellants’ brief states: “The 865 shares complained of were issued on August 26th, 1942. Charles T. Crothers learned of that fact two or three weeks thereafter; and his brother, Edmund W. Crotheris learned about it three or four weeks after said Stock was issued. Charles T. Crothers understood from the first that the Sale of 1,500 Shares had been authorized; and no one had ever represented to him that no more than 1,035 Shares would be issued. In July, 1942, Charles T. Crothers refused to turn over half of the Sinclair Stock, then purchased by him, to Ross, and assigned for his reason the fact that Ross could buy more Stock from the Corporation; and he also attempted to buy the remaining 100 of the authorized 1,500 Shares for himself.

On February 1st, 1943, at a Meeting of Stockholders, Charles’ T. Crothers was elected a Director and served for one year. At that Meeting the Treasurer’s Report was accepted on a motion seconded by Edmund W. Crothers. At that Meeting of the Stockholders a Resolution was adopted, expressing to the Management and Employees the appreciation of the Stockholders for the manner in which the operation of the Corporation had been conducted during the previous year. The minutes show that Edmund W. Crothers seconded this Resolution.

Charles T. Crothers was then present, and testified that he does not know whether he ⁵⁸¹ voted for this Resolution, but he did not object to it. Edmund W. Crothers testified that he did not second the Resolution of Approbation and that he objected to the Minutes on the following year (after this suit was instituted by his brother, but before he, Edmund W. Crothers, had become a party thereto), and that he assigned as his reason for his protest that he was just reserving his decision. On September 13th, 1943, Charles T. Crothers, then a Director, seconded and voted for the Declaration of a Dividend on all 1,400 Shares of Stock. No protest was made to the Corporation about the issuance of the 365 Shares until a letter of protest was written by counsel for Charles T.