Shaw v. Davis

McSherry, J., delivered the opinion of the Court. We have given most patient and laborious study to the voluminous record now before us, as well as to the full ³¹⁰ and exhaustive briefs filed by the distinguished counsel who so ably argued the cause; and, after mature deliberation, we now proceed to state as concisely as possible the reasons upon which the conclusions we have reached "are founded. , The West Virginia Central and Pittsburgh Railway Company was incorporated by the Legislature of West Virginia, with an authorized capital stock of sixty thousand shares, of the par value of one hundred dollars per-share. Of these shares, when the pending bill of complaint was' filed, five thousand were held in trust for the company’s treasury; seven thousand two hundred were-owned by the appellant, Alexander Shaw; two thousand six hundred by other members of his family; thirty-thousand one hundred and ninety-four by Henry Gr. Davis, Thomas R. Davis and Stephen B. Elkins and their families; and the residue by Thomas F. Bayard, James G-.

Blaine, William Windom, William Keyser and quite a number of other persons. The road extends from West Virginia Junction, near Piedmont, on the line of the Baltimore and Ohio Railroad, in a southerly direction to Davis, in West Virginia, a distance of some fifty-eight miles. The company owns large tracts of coal and timber land, and is chiefly a coal and lumber carrying road. Its sole outlet was, originally, the Baltimore and Ohio Railroad at West Virginia Junction.

Not long after it began operations, it'encountered serious difficulties with the Baltimore and Ohio, and, as described by Mr. William Keyser, it soon “became apparent that the business of the West Virginia Central was largely diminished, and that it was greatly embarrassed by the lack of harmonious relations; in fact, the West Virginia Central property became almost sidetracked by the lack of facilities, the want of a cordial understanding, and its consequent inability to make contracts which it would be able-to fulfil; and at last ³¹¹ the necessity was forced upon this road to get another oirtlet or accept the situation of being entirely bottled up.” As a result of this condition the Piedmont and Cumberland Bailway Company was organized and incorporated with a capital stock of thirteen thousand shares, for the construction of a road, parallel to the Baltimore and Ohio, from Piedmont to Cumberland1. Of the capital stock Henry Gr. Davis, H. Gr. Davis and Brother, and Stephen B. Elkins, hold seven thousand two hundred and ninety-five shares; the Pennsylvania Bailroad Company holds four thousand shares, and the residue is held in smaller lots by other persons — Mr. Shaw owning none of it.

On May the twenty-first, 1886, a tri-partite agreement was entered into between the West Virginia Central, the Piedmont and Cumberland, and the Pennsylvania Bailroad Companies, whereby the latter agreed to set apart five per cent, of its receipts from traffic coming to its road from the West Virginia Central and going from its road to the latter, as a fund to guarantee the payment of the interest on the bonds of the Piedmont and Cumberland road, which were to be issued to the extent of six hundred and fifty thousand dollars, that the money might be thereby raised for the construction of the new road. The West Virginia Central agreed to deliver to the Piedmont and Cumberland all traffic it could control, and the Piedmont and Cumberland agreed to deliver to the Pennsylvania Bailroad one-half of all traffic hauled by it to Cumberland; and this agreement was ratified by the stockholders of the West Virginia Central, at a meeting in January, 1887, by a vote of thirty-seven thousand three hundred and ninety-five shares. With the money raised by the negotiations of these bonds, and by a call of a small instalment of the stock subscribed, the Piedmont and Cumberland Bailroad was built. When finished, in August, 1887, it was operated hy the ³¹² West Virginia Central under a verbal agreement for sixty per cent, of the gross earnings.

Subsequently, and as will be stated more at large later on, the stockholders ,of the West Virginia Central appointed a committee to consider, and report at an adjourned meeting to be held on March the fifteenth, 1890, a permanent lease of the Piedmont and Cumberland road. On the fourteenth of March, the appellant, Alexander Shaw, as a minority stockholder of the West Virginia Central, in behalf of himself and of other stockholders who might come in and be made parties, filed the bill of complaint which inaugurated the pending litigation. The averments of the bill relate to two distinct and disconnected subjects. From paragraph one, to and including paragraph seven, the bill is confined to a statement of transactions between the West Virginia Central, on the one side, and Henry Gr.

Davis, Thomas B. Davis, and Stephen B. Elkins, on the other, and these are introduced, apparently, for the purpose of showing the mode in which these majority stockholders dealt with the company in matters pertaining, not to this proceeding, but to something totally different. The remaining paragraphs of the bill have reference to transactions between the West Virginia Central and the Piedmont and Cumberland, and to the dealings of Henry Gr. Davis, Thomas B. Davis, and Stephen B. Elkins, as officers and directors of these corporations, with the corporations themselves, and they may be briefly stated as follows: That Messrs. Davis and Elkins, having subscribed for a majority of the stock of the Piedmont and Cumberland road, gave value to their shares by the following process: 1st.

With a view of constructing a road that could be cheaply built, they selected a location so low in the valley as to expose the road to heavy and destructive damages in times of floods in the Potomac; that the road was in other respects defectively ³¹³ constructed, and that it is ruinously expensive to operate; that it was designedly so constructed, with a view of having it operated by the West Virginia Central, and of throwing upon the latter company the heavy cost of operating it. 2nd. Beforethe Piedmont and Cumberland road was in a condition for the transportation of freight or passengers, the Messrs. Davis and Elkins used their official power in the West Virginia Central to make the latter coinpanj1' complete the construction of the Piedmont and Cumberland road, and without authority from the stockholders of the West Virginia Central, they, the Messrs. Davis and Elkins, as officials of the two companies made an arrangement by which the West Virginia Central Company began the operation of the Piedmont and Cumberland road in its incomplete condition, whereby the West Virginia Central was made to pay, not only the ordinary cost of operation, but to complete the Piedmont and Cumberland road, and to put upon it betterments and improvements for the benefit of themselves as the principal stockholders therein. 3rd.

Whilst the Piedmont and Cumberland road was still a most precarious property, and sure to entail immense expense in its operation, the Messrs. Davis and Elkins determined, at the annual meeting in January, 1890, to risk the attempt to make the stockholders of the West Virginia Central ratify a permanent lease of the Piedmont and Cumberland road, which had been prepared and presented to the meeting; and that the lease was most disadvantageous to the West Virginia Central, and most advantageous to the Piedmont and Cumberland Company; and that the rate of earnings proposed in said lease as a compensation to the West Virginia Central was inadequate, and would be a fraud on the stockholders of that company. 4th. When the lease was proposed to the stockholders, the plaintiff made a violent protest against any lease being executed until the ac ³¹⁴ •counts between the two companies should be first adjusted, without which adjustment'the earning capacity of the Piedmont and Cumberland road, the expense incident to maintaining it, or a fair rate of rental could not be ascertained. That the confused state of' the accounts kept by the West Virginia Central renders any accurate statement impossible; and it would be a fraud 'on the stockholders of the West Virginia Central to have any lease made before a full settlement of these* accounts between the two companies; that Messrs.

Davis and Elkins consented-to adjourn the stockholders’ meeting until March the fifteenth, 1890, and that it is their design at that meeting to use the power which they have as the holders of the majority of the stock of the West Virginia Central to compel the ratification and acceptance of the lease, which they, as officers of the West Virginia Central, have agreed upon with themselves as officers of the Piedmont and Cumberland Company. The prayers for ‘relief are, — first, for a discovery of the ownership of the stock of the Piedmont and Cumberland Railway; second, for a discovery of the holdings of the stock of the Piedmont and Cumberland Company by the West Virginia Central Company, and the moneys spent by the latter company on the road of the first named company; third, for an account as to how much money is due to the West Virginia Central by the Piedmont and Cumberland Company for advances made by the West Virginia Central on any account, and, particularly on account of the completion of the Piedmont and Cumberland which was paid by the West Virginia Central out of the sixty per cent, operating expenses received under the verbal lease, and which ought to have been charged to the Piedmont and Cumberland and paid out of the forty per cent, of the gross earnings received by it, and, fourth, for an injunction to.restrain the execution of the proposed lease, or any other lease, until ³¹⁵ the Court can ascertain what would be a proper apportionment of the earnings between the leased road and the operating road, and what, in a word, ought to he the terms, conditions and covenants of such a lease. An injunction as prayed was granted on March the fourteenth, 1890, and on April the twenty-fourth the defendants answered, denying the material allegations of the bill, and moved for a dissolution of the injunction. A general replication was filed, and a large mass of evidence, covering nearly a thousand printed pages, was taken.

At the hearing the Circuit Court of Baltimore City on March the twenty-third, 1893, dissolved the injunction and dismissed the bill. From that decree this appeal was taken. It will be observed at the threshold that the relief prayed for has no relation whatever to the first seven paragraphs of the bill, and whether the averments contained therein be true or be false is purely a speculative question under the present structure of the bill of complaint. If those averments had been conceded by the answers to be true, relating as they do exclusively to alleged transactions between Messrs.

Davis and Elkins and the West Virginia Central Company, it is not perceived how they could influence or affect, one way or the other; totally different transactions in no way connected with or dependent on them. No relief is sought as to anything averred in these seven paragraphs. The case, then, before us is that of a minority stockholder filing a bill in his own behalf and in behalf of others who may subsequently join him, to restrain by injunction the majority stockholders of one railroad company from leasing, except with the leave of a Court of equity, and upon the terms which it may prescribe, the road of another railway company, in which latter company the majority stockholders are the same persons who are the majority stockholders in the proposed lessee ³¹⁶ company; and also praying for an account between the two companies of antecedent financial transactions. Naturally, the inquiries which such a case suggests at the very outset are, — first, what jurisdiction has a Court of equity to control the internal management of a corporation at the instance of a minority stockholder; and, secondly, .in what manner does the circumstance that the majority of the stock is held by the same persons in both the companies, afiect the question of jurisdiction ?

And, first, it may be stated, as the result of all the authorities, that whenever any action of either directors or stockholders is relied on in a suit by a minority stockholder for the purpose of invoking the interposition of a Court of equity, if the act complained of be neither ultra vires, fraudulent, nor illegal, the Court will refuse its intervention because powerless to grant it, and will leave all such matters to be disposed of by the majority of the stockholders in such manner as their interests may dictate, and their action will be binding on all, whether approved of by the minority or not/ “In this country,” said the late Mr. Justice Miller, in speaking for the Supreme Court of the United States, in Hawes vs. Oakland, 104 U. S., 450 , “the cases outside the Federal Courts are not numerous, and, while they admit the right of a stockholder to sue in cases where the corporation is the proper party to bring the suit, they limit this right to cases where the directors are guilty of a fraud, or a breach of trust, or are proceeding ultra vires.” And so in MacDougall vs. Gardiner, L. R., 1 Ch. Div., 13, 21, James, L. J., said: “I think it is of the utmost importance in all these companies that the rule, which is well known in this Court as the rule in Mozley vs. Alston, 1 Ph. Ch., 790, and Low vs. The Governor and Company of Copper Miners, 2 Phil. Ch., 740, and Foss vs. Harbottle, 2 Hare, 461, should be always adhered to; that is to say, that nothing connected with internal dis ³¹⁷ putes between tbe shareholders, is to be made the subject of a bill by some one shareholder in hehalf of himself, and others, unless there be something illegal, oppressive, or fraudulent — unless there is something ultra vires on the part of the company, qua company, or on the part of the majority of the company, so that they are not fit persons to determine it; but that every litigation must he in the name of the company, if the company really desire it.

Because there may be a great many wrongs committed in a company — there may he claims against directors, there may be claims against officers, there may be claims against debtors, there may be a great variety of things which a company may be well entitled to complain of, but which, as a matter of good sense, they do not think it right to make a subject of litigation; and it is the company, as a company, which will make anything that is wrong to the company the subject of litigation, or whether it will take steps to prevent the wrong being done. * * * * Everything in this bill, as far as I can see, if it is a wrong, is a wrong to the company. Whether it ought to have been done, or ought not to have been done, depends on whether it is for the good of the company it should have been done, or for the good of the company it should not have been done; and, putting aside all illegality on the part of the majority, it is for the company to determine whether it is for the good of the company that the thing should be done, or should not be done, or left unnoticed.” In the same case Mellish, L. J., after observing that very often, in companies things are done which ought not to be done, proceeds: “Now, if that gives a right to every member of the company to file a bill to have the question decided, then, if there happens to be a cantankerous member, or one member who loves litigation, everything of this kind will be litigated, whereas, if the bill must be filed in the name of the company, then, unless ³¹⁸ there is a majority who really wish for litigation, the litigation .will not go on. In my opinion, if the thing complained of is a thing which - in substance the majority are entitled .to do, or if something has been done irregularly, which the majority of the company are entitled to do regularly, or if something has been done illegally which, the majority has the right, to do legally, t-here can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called, and then^ ultimately, the majority gets its wishes. Is it not better that the rule shall be adhered to that, if it is a thing which the majority are the masters of, the majority, in substance, shall be entitled to have their will followed ?

If it is a thing of that nature, it only comes to this, that the majority are the only persons who can complain that a thing which they are entitled to do has been done irregularly; and that, as I understand it, is what has been decided by the cases of Mozley vs. Alston and Foss vs. Harbottle. In my opinion this is the rule to be maintained.” See also, Gray vs. Lewis, L. R., 8 Ch. App., 1050. Secondly.

The fact that the same persons hold the majority of the stock in both companies does not of itself enlarge the Court’s jurisdiction; the act complained of furnishes the test of jurisdiction, and it must be ultra vires, fraudulent or illegal; nothing short of this will suffice. This is true even in a case where directors and not stockholders do the act complained of. Booth, et al. vs. Robinson, et al., 55 Md., 441 . And for stronger and more obvious reasons it is also true in a case where stockholders themselves act directly.

They are not.trustees or quasi trustees for each other. Even a director is not, strictly speaking, a trustee. Spering’s Appeal, 11 Pa. St., 11; Smith vs. Anderson, 15 Ch.

L)., 241. In Pender vs. Lushington, L. R., 6 Ch. Div., 10, Jessel, M. R., in speaking of the rights of a stockholder said: “I cannot de ³¹⁹ prive him of his property, though he may not make use of the property in the way I approve. This is really the question, because, if these stockholders have a right of property, then I think all the arguments which have been addressed to me as to the motives which induced them to exercise it, are entirely beside the question.” Then, after referring to a decision by Mellisii, the Master of the Rolls proceeded: “In other words, he (Mellisii, J.) admits a man may be actuated in giving his vote as stockholder, by interests adverse to the interests of the company as a whole; he may think it was for his particular interest that a certain course may be taken which may be, in the opinion of others, adverse to the interests of the company as a whole; - but he cannot be restrained from giving his vote in what way he pleases, because he is influenced by that motive.

There is, if I may so say, no obligation on a shareholder of a company to give his vote merely with a view to what other persons may consider the interests of the company at large. He has a right, if he thinks fit, to give his vote from motives or promptings of what he considers his own individual interests. This being so, the arguments which have been addressed to me, as to whether or not the votes which were given, would bring about the ruin of the company; or whether or not the motive was an improper one which induced these gentlemen to give their votes, or whether or not their conduct shows a want of appreciation of the principles on which this company was founded, appear to me to be wholly immaterial.” And in Manhattan Elev. R. Co. Case, 11 Daly, (N. Y.,) 516, the Court says: “It is argued that, if common directors are disqualified from acting, so are common stockholders incapable to ratify agreements between their companies; and that the holder of one share of stock in each company could prevent any action at a stockholders’ meeting relating to the two companies, no ³²⁰