Waters v. Horace Waters & Co.

Prior to the month of July Horace Waters, now deceased, William H. Alfring, now deceased, and the defendants Samuel T. White and Timothy Leeds Waters, were copartners engaged in a mercantile and manufacturing business in the city of New York under the name and style of “Horace Waters & Company.” They entered into a written agreement under their hands and seals dated July 15, 1886, by which they agreed to form a corporation by the name of Horace Waters & Co., with a capital stock of $150,000. Pursuant to the’agreement, the defendant Horace Waters & Co. was duly organized as a corporation according to the laws of the state of New York, and said copartners were the incorporators thereof. The assets of the firm were assigned to the said corporation, and certificates of stock were thereafter duly issued to the said incorporators in payment for their several interests therein,, to wit, to Horace Waters, 530 shares, to Alfring, 198 shares, to White, 141 shares, and to Timothy Leeds Waters, 141 shares, of the par value of $100 each. Said agreement provided, among other things, that the parties thereto should immediately on the receipt thereof “invest any dividends and any interest on undrawn dividends and any amounts paid to them by said Horace Waters as hereinafter provided in the purchase from the corporation of its capital stock for so long as and whenever it has any unissued either of its original stock or of any increase thereof”; that, “in all cases of the purchase of unissued stock of the corporation, each of the parties hereto shall be entitled during the lifetime of the said Horace Waters to purchase an equal share thereof and an equal share of any shares which any other party hereto may be entitled to take but shall elect not to take, and after the decease of said Horace Waters each of the other parties hereto, and the executor, trustee, and legatees of the said Horace Waters, shall be entitled to purchase all such shares of stock in the proportion of the number of shares then held by the said several parties, respectively,” and the said Horace Waters ■covenanted and agreed that:

“So long as he should live and each of the other parties hereto shall live and in good faith observe all the conditions, agreements, and covenants herein ■contained to be kept, performed, or observed by them, and so long as he shall receive his said salary of $175 per week, he will pay to them and each of them out of any dividends which may be declared and which he may from time to time receive on his said stock a sum of money which added to the •dividends then declared on the stock then held by them respectively shall ■equal one-quarter of the dividend then declared.”

On May 3, 1893, the defendants Waters and White each sold and transferred one share of stock to Alexander Hamilton, for which the said Hamilton paid cash at par, and was thereupon elected a trustee of said company. In July, 1896, the defendants Waters and White each sold and transferred one share to I. C. Swazey, who was thereupon elected a trustee. The shares of stock were sold to Hamilton and Swazey for the purpose of qualifying each of them to fill the office of trustee. In April, 1898, Sanborn, as executor of Horace Waters, held 1,007 shares of the stock for distribution under the will, and, as these shares could not be divided without leaving fractions, he sold and transferred to the defendant Waters two shares, and to the plaintiff Fanny L. Waters one share belonging to the estate of the said testator,1 which sale was made at private sale, and without giving any notice to the other stockholders of the corporation. White had notice of such sale after the same was made and acquiesced there

The defendants Waters and White have been trustees and directors of Horace Waters & Co. ever since its organization, and since the death of Horace Waters T. Leeds Waters has been the president and treasurer, and the defendant White has remained the vice president and secretary of the corporation. Since July, 1905, the trustees have been T. Leeds Waters, Samuel T„ White, Noel B. Sanborn, and Charles Scholz, the defendants in this action. On February 12, 1900, the defendant Waters, acting as president and treasurer, and the defendant White, acting as secretary of said corporation, sold to Alexander Hamilton three shares of the then unissued capital stock, and issued and delivered to him a certificate therefor, which said stock was so issued and delivered at par and without giving the other stockholders of the corporation an opportunity to subscribe for or to make the same or a proportional part thereof. At the time said shares of stock were sold and issued to Hamilton he had for many years been in the employ of Horace Waters & Co. as its cashier, and for nearly seven years had been and then was one of the trustees thereof. At the time of said issue, the defendants Waters, White, and the said Hamilton were the only trustees of the corporation, and all of them assented to and participated in the issue of the stock to Hamilton, but no formal resolution was passed and entered authorizing such issue. Hamilton died in July, 1901, and at the time of his death he was the owner of five shares which stood in his name on the books of the corporation. After the death of Hamilton, the defendant White purchased from his administratrix said five shares of stock, paying her therefor $500, the par value thereof, which sum be borrowed from the corporation through its treasurer, the defendant Waters, and such stock was duly assigned and transferred to him by said administratrix, and was thereafter transferred on the books of the corporation to said White, but no new stock certificate therefor was issued. White repaid to the corporation the $500 so loaned to him. From the time Alexander Hamilton became the own

“Resolved, that we do hereby ratify, approve and confirm the said several issues of stock, and each and every one of them, and do hereby direct and declare that each of said issues of stock, shall have the same force and effect and be of the same validity as if the board of trustees of this company had by a formal resolution, entered in the minutes, authorized and directed each of the said issues of stock- before the issue thereof.”

The defendant Waters protested against such action, and asked that the matter be deferred, which request was denied, and the resolution was adopted by the votes of a majority of the trustees; said Waters voting in the negative. In November, 1905, the defendant Samuel T. White transferred three of the shares of stock which had formerly been issued to Alexander Hamilton to the defendant Solomon H. Kohn at their par value of $100 each. The plaintiff, who is the wife of the defendant Waters, and the owner of 252 shares out of the 2,118 issued, brings this action in a representative capacity to have the three shares of stock issued to Hamilton in 1900 surrendered and canceled. She alleges that the stockholders, by virtue of their relation as stockholders and of the agreement, were and are legally and equitably entitled to subscribe for and purchase any unissued stock in preference to -others, and the same could not be lawfully issued to others than said stockholders without their express consent and sanction; that without the authority, knowledge, or consent of the plaintiff or of any stockholder, except themselves, the defendant White acting as secretary and the other officer or officers (which included her husband), whose duty it was to authenticate its certificates of stock, acting in bad faith and in disregard of the legal and equitable rights of the stockholders, wrongfully, unlawfully, and fraudulently, and in violation' of their, and each of their obligations, as trustees, sold and issued three shares of stock to Alexander Hamilton without giving the other stockholders an opportunity to subscribe for or to take the same; that such sale was done at the instigation of the defendant White, and to his nominee, and the issue of such stock was a part of a scheme and plan on the part of White to obtain control of the corporation, and was a fraud upon the corporation and its stockholders; that, in pursuance of his fraudulent scheme and plan to obtain control of the corporation, the defendant White caused the resolution to be introduced at the meeting of the trustees which ratified and confirmed the several issues of stock which had been made; that said White threatens and intends

It is difficult to perceive what right of action the corporation has under the circumstances disclosed, or what interest it has as to who shall own its stock, or what fraud has been perpetrated on it by the failure to offer one of its stockholders an opportunity to subscribe to her proportional part of three shares issued for value to another stockholder. In so far as plaintiff claims any rights under the original, agreement of the four copartners of the old firm of Horace Waters & Co. as a result of which agreement the corporation was incorporated, it is' enough to say that neither she nor the corporation was party to that agreement, that said agreement only bound the original parties thereto, and that in no event could the corporation, as such, be affected thereby. And so o,f any rights claimed under the will of her father by which she acquired title to certain shares of the stock of the corporation. That will spoke only to the executor and trustee thereunder, and governed only the legatees named therein. The corporation as such was not affected or controlled thereby. Whatever rights or rlaimg plaintiff may assert or may have under the agreement and from' the will are absolutely personal to her to be asserted against the individual parties to said agreement, or taking or acting by virtue of said will, and are not to be asserted in such an action as that at bar, which depends entirely for its status in court upon the proposition that rights of the corporation are being asserted and remedies asked for on its behalf.

Stockholders’ suits of a representative character have been often brought and often sustained. The rules governing them have been pretty well formulated. The learned counsel for the respondent states' in his brief:

“There are three classes of stockholders’ wrongs which the corporation is ordinarily the party to remedy, viz., wrongs arising from a breach of trust by directors or a majority of the stockholders, and these are (1) fraudulent acts; (2) ultra vires acts; (3) negligence of corporate directors.’’

We may dismiss the second class, ultra vires acts. These three shares of stock are not overissued stock. The corporation had so far back as February, 1890, duly authorized an increase in its capital stock, and it was from the unissued portion of said increase held in its treasury that these three shares were issued. The cases, having to do with an overissue of stock, therefore have no application.

The third class of cases may likewise be dismissed from consideration, where a right of action accrues to a corporation for damage and loss occasioned to it by the negligence of its trustees and officers in the management of its affairs. ‘No negligence is alleged or proved, and no damage resulting therefrom.

It follows that the sole basis of the action must be the fraud which is so elaborately set forth. It appears that in this small business corporation, formed in succession of and to carry on the business of a preceding copartnership, of which there were originally but four stockholders, and at the time of the transaction complained of but five stockholders and three trustees, the directors had not been in the habit of holding formal meetings for the purpose of authorizing the issuance of stock; that between April 20, 1887, and January 25, 1890, there had been 27 separate instances of the issuance of stock by the officers of the company without a formal vote of its trustees. These three shares of stock were issued in precisely the same way that the prior issues had been made; that is, by the agreement of Waters, the president, and White, the secretary, who signed and sealed the certificate. The allegation that the issue of such stock was a part of a scheme and plan on

White testified:

“We desired to have Mr. Hamilton retained. His services were valuable tc the company, and we desired also to have his money retained, and the suggestion was that we give him stock for that. * * * He said that he could buy three shares if we could sell him that. He was anxious to make himself as well connected with the company as he could. X talked with Mr. Waters about it in a general way, and Mr. Waters was agreeable to it, or was favorable to it, and Mr. Hamilton wanted it, and that is how it came to be issued. * * * We desired to sell Mr. Hamilton stock in order to fasten him or identify him with the business very much. He was very useful to us. He was a man of good judgment, and his services were very valuable. Mr. Waters felt in that regard even more than I did. He was sort of a protege of Mr. Waters. Mr. Hamilton paid for this stock by applying $300 of the indebtedness that we owed him. That indebtedness was for labor done.”

Mr. Waters testified that he consented to the issue of these three shares of stock, and said:

“I signed the certificates, and Mr. Hamilton paid for the three shares of stock, and that money came into my hands as treasurer. Those three shares of Hamilton’s were voted on at every annual election after that. I did not object to its being voted on, and dividends were paid on it.”

Every stockholder has acquiesced in that sale of the three shares of stock and in the payment of the dividends thereon, with the exception of the plaintiff, and the trustees, before the institution of this suit, adopted a resolution expressly ratifying the said transaction, as well as the 26 other issues of stock heretofore alluded to. The plaintiff’s husband, who held her proxy, acquiesced and participated in the original sale and in the successive payments of dividends. Therefore the corporation and all of its stockholders, with the single exception of the plaintiff, have ratified the transaction. It seems to me clear that the corporation cannot now bring an action to cancel said stock upon the ground of fraud. If the corporation has no such cause of action, the plaintiff, suing as its representative and in its behalf, evidently has none.

We must therefore, as it seems to me, eliminate the only ground upon which it can be claimed in this case that a cause of action exists in favor of the corporation, as, while the complaint alleges such grounds sufficiently to be demurrer proof, there is no evidence in the case to sustain such allegations. Nor, indeed, does the learned court find fraud as a matter of fact. In his conclusions of law he does say “that the issuing of the three shares of capital stock of the defendant Horace Waters & Co. to Alexander Hamilton was illegal and a fraud upon the corporation, and upon its" stockholders,” but that-conclusion of law is not sustained by his findings of fact nor by the evidence.

We reach the conclusion, therefore, that the judgment appealed from should be reversed, and, as upon the facts found, most of which are conceded by stipulation entered into between the parties, there is no cause of action in behalf of the corporation, and therefore none in the plaintiff in the representative capacity in which she sues, the complaint should be dismissed, with costs and disbursements to the appellant. All concur.