Continental Insurance v. New York & Harlem Railroad

This action was originally brought by the Continental Insurance Company, as a stockholder of the New York & Harlem Railroad Company, on behalf of itself and all other stockholders of the Harlem Companv similarly situated. Subsequently, by orders of the court, other stockholders of the Harlem Company were eiitde parties plaintiff, so that at the time of the trial the plaintiffs were

To entitle the plaintiffs to any relief in this action, they were required to show that a cause of action existed in favor of the New York & Harlem Railroad Company to set aside the agreement, and to have it declared null and void. There is no claim that this agreement was ultra vires of the corporation. The claim of the plaintiffs seems to be based upon the fact that a majority of the directors of the Harlem Company were also directors of the Central Company, and that this agreement should be declared void because of the fact that a majority of the directors of each of the contracting companies were directors of both companies. It is not alleged that the Harlem Company, either by its directors or by a majority of its stockholders, has elected to rescind this agreement; but the plaintiffs, owning about one-twentieth of the stock of the Harlem Company, have elected to rescind the contract; the other nineteen-twentieths of the stockholders of the company having refused or failed to join with the plaintiffs in their attack upon this agreement, and having accepted its advantages by the receipt of dividends paid by the Central Company to the stockholders of the Harlem Company under its provisions.

The complaint contains allegations tending to show bad faith on .the part of the directors in both corporations. It is sufficient to say that all of these charges, so far as they reflect upon the integrity of any of these gentlemen, were not only not sustained by a particle of evidence offered on behalf of the plaintiffs, but that the evidence disproved all of these allegations. Each of these gentlemen, with one exception, was interested more largely in the Harlem Company than in the Central Company, and would have profited individually to a much greater extent if the contention of the plaintiffs could be sustained. The case was tried by a referee who for many years has occupied a very distinguished position in the judiciary of this state, and he has rendered an extremely able opinion, in determining that the plaintiffs had no cause of action; and it would not be necessary, for us to say anything further in disposing of this appeal than was said by him, but that we prefer to place our judgment upon the binding effect on the minority stockholders of the action of a majority of the stockholders approving the agreement that was made, and directing the directors and officers of the corporation to execute it On its- behalf. To present this question, it is necessary to state the relations that existed between these two corporations and the precise question that 'was presented to them when this agreement was approved by the stockholders of the two companies:

The Harlem Company was organized to operate a steam railroad in the. state of New York, and the Central Company was organized to operate a railroad between New York and Buffalo, in the state of New

“And that it will, at the maturity thereof, pay the principal of the said "‘Consolidated Mortgage’ bonds if, and in case, it should not be paid by the party of the first part [Harlem Company]. In case of the payment thereof, or of some or any part thereof by the said party of the first part, then, and in that event, the said Party of the second part [Central Company] shall, thereafter, pay to the said party of the first part, semiannually, on the days when interest would become due and payable on said bonds, if the time thereof had been extended, an amount equal to such interest on said bonds, or on such part of them as may have been paid by the said party of the first part, so as fairly to adjust the obligation of the said party of the second part, herein contained, as to the annual rent on the said railroad and property -herein demised. In ease, however, the said ‘Consolidated Mortgage’ bonds shall be paid by the said party of the second part, the said party of the first part agrees that it will, whenever requested by the said party of the second part so to do, issue in lieu thereof new bonds bearing a similar rate of in

terest, or such other rate as may be agreed upon, with, so far as may be required, proper coupons or interest warrants therefor appended, and secured by a suitable mortgage upon the railroad property and franchises hereby demised; such bonds to be payable at such time or times, and to such person or persons as may be prescribed by the said party of the second part; and will deliver such new bonds to the said party of the second part, to be sold or disposed of in its discretion; in which case the obligation of the said party of the second part herein contained, with regard to the payment of interest on the said ‘Consolidated Mortgage’ bonds shall be deemed and held to apply to interest on such new bonds.”

This lease also contains a provision that' the party of the second part may at any time during the continuance of the demised term change and alter the line, way, and gauge of the said demised road or branch, and, on so doing, may discontinue any part of the present way or track of said road or branch, and any of the machine shops or depots required for the use of the line, and may .also change the grade or grades of the road, or alter or change the location of any of the tracks, etc., and may purchase and acquire title to any additional real estate for the use of said road, or may exchange its lands or buildings for any other lands more convenient or necessary for its use, and of equal value for the uses and purposes of the said road; but all such alterations, changes, purchases, or exchanges are to be made at the proper cost and charge of the party of the second part; and the party of the second part, its successors and assigns, may also from time to time, during the continuance of the said term, sell and dispose of such part of the demised premises and property as may not be necessary for the use of the said demised railroad and branch; and the party of the first part, its successors and assigns, shall, in case of any such sale or exchange, and upon the demand in writing of the party of the second part, at any time, and from time to time, execute a good and sufficient deed, but without covenants or warranty of title, of any part of the said premises which the party of the second part, its successors or assigns, may so.agree to sell or exchange as aforesaid to the purchaser or the party with whom the exchange shall be made; and the Central Company covenanted to account and pay over to the Harlem Company the consideration money received for any portion of the lands demised, which, having been found not necessary for the use of the demised railroad and branch, may have been, disposed of absolutely, except such as may have been exchanged for other lands of equal value, but no interest was to accrue on such consideration money during the continuance of the contract. By the schedule annexed to the lease, it appeared that the consolidated bonds, the payment of interest on which was assumed by the Central Company, became due April 1, 1900, and the interest thereon was t per cent, per annum. All of the other bonds of the Harlem Company were to be paid by the Central Company at maturity. This obligation the Central Company performed, leaving the only indebtedness of the Harlem Company outstanding $12,000,000.

Since the execution of that lease, the Central Company has been in possession of the Harlem Road, operating it as a part of the Central System, paying the rents reserved, and complying with the obligations and conditions of the lease. These $12,000,000 of bonds

This being the situation, on the 29th of June, 1897, an action was commenced in the Supreme Court by the Central Company against the Harlem Company to have a judicial determination of the questions between the two companies. An answer was interposed in that action, and the case was noticed for trial on the first Monday of November, 1897. This action appeared on the day calendar for the 16th of May, 1898, but was adjourned until the October term. Thus on the 1st of May, 1900, $12,000,000 had to tie provided for the pay

This being the situation, at a meeting of the directors of the Central Company held on June 22, 1898, a resolution was adopted that recited the dispute between the respective companies, and the pendency of a suit to determine that dispute, and that it was the opinion of the board of directors that it was for the best interest of the company and the stockholders that there should be an amicable adjustment of the differences, and a committee was appointed to negotiate with the Harlem Company for an adjustment of the matters in controversy; and on June 28, 1898, at a meeting of the

This meeting of the stockholders of the Harlem Company was held on the 5th of October, 1898. There were represented at that meeting 157,561 shares of the capital stock of the corporation, out of the total capital of 200,000 shares. The resolution of the board of directors of June 28, 1898, and the proceedings of the meeting of the committee of the directors of the Harlem Company with the committee appointed by the Central Company, and a draft of the proposed supplemental contract between the two companies, as approved by the two committees, were presented to the stockholders; and thereupon a resolution was submitted that the stockholders of the Harlem Company approved the resolution of the board of trustees and of the committee appointed under said resolution, adopted in joint session with a similar committee of the Central Company held the 10th day of August, 1898, and authorizing the board of directors and the proper officers of the Harlem Company, and under its corporate seal, to make, execute, and deliver to and with the Central Company, and to perform, the second supplemental contract, modifying and amending the provisions of the contract of lease of April 1, 1873, substantially as set forth in the printed draft of contract submitted to the meeting which approved of the form and provisions of the said supplemental contract. There

There is not presented by this record a particle of evidence that any fraud was practiced upon the stockholders of the Harlem Company, that they were not fully cognizant of the question that was to be submitted to them, that any stockholder who voted to approve this supplemental agreement was misled in any way, or that any of the stockholders who voted in favor of the agreement desired to retract or change their vote upon this question, or now wish to. avoid the agreement. The result of this agreement is to increase the dividends upon the stock of the Harlem Company 2 per cent, per year. If this agreement should be avoided, the question as to whether the Harlem Com-, pany was entitled to any increase would be opened, and the result might be that these stockholders would now lose the additional dividend. The court is asked by the holders of one-twentieth of the stock of the company to take away from the holders of the remaining nineteen-twentieths of the stock the benefits accruing to them under the agreement. If we should assume that any action of the board of directors in making this compromise would have been void without the consent of the stockholders, there was nothing to prevent the stockholders of the company from making the agreement; and, when a majority had approved it, no principle justified the court, at the request of a minority of the stockholders, in overriding the majority as to the advantages to the corporation and the stockholders by its adoption.

The Presiding Justice of this court, in Met. Elev. Ry. Co. v. Man. Ry. Co., 14 Abb. N. C. 103 , elaborately discussed the consequences resulting where contracts are made between two corporations with common directors, and, after a most thorough examination of the authorities, his conclusion is thus stated:

“The principle ia here recognized that the majority of the shareholders may ratify a lease made by the directors and that a minority cannot dis-affirm ; that therefore it must be the majority of the shareholders, acting

through the corporation, who repudiate, and no shareholder has the power to exercise that right against the will of the majority.”

And further, in speaking of the right to disaffirm such a contract, he said:

“It is urged against this rule that, if common directors are disqualified from acting, so are common shareholders incompetent to ratify agreements between their companies, and that the holders of one share of stock in each of the companies could prevent any action at a shareholders’ meeting relating to the two companies, no matter how advantageous such action might seem to the holders of every other share of stock. I do not say that the disqualification extends to a shareholder. I can see no reason why it should. The disability rests entirely upon the fiduciary relationship. A shareholder is trustee for nobody. He has only his own interests to look after, as such shareholder, closely connected, as they undoubtedly are, in practice, with the interests of the other shareholders. But he holds no such fiduciary relation to the corporation as pertains to the office of director. And I think that it is carrying the rule to a much greater length than the reasons which have given it existence require.”

In Gamble v. Q. C. W. Co., 123 N. Y. 91 , 25 N. E. 201 , 9 L. R. A. 527 , the Court of Appeals discusses the question as to the circumstances under which minority stockholders of a corporation can maintain an action in equity to rescind the act of a majority. In speaking of the right of the majority stockholders at a meeting of the stockholders upon a proposition submitted to the meeting, the court say:

“A shareholder has a legal right at a meeting of the shareholders to vote upon a measure, even though he has a personal interest therein separate from other shareholders. In such a meeting each shareholder represents himself and his own interests solely, and he in no sense acts as a trustee or representative of others. The law of self-interest has at such time very great and proper sway. There can be little doubt, too, that at such meetings those who do vote upon their own stock vote upon it in the light solely of their own interest, or at least in what they conceive to be their own interest. Their action resulting from such votes must not be so detrimental to the interests of the corporation itself as to lead to the necessary inference that the interests of the majority of the shareholders lie wholly outside of, and in opposition to, the interests of the corporation and of the minority of the shareholders, and that their action is a wanton or fraudulent destruction of the rights of such minority. In such cases it may be stated that the action of the majority of the shareholders may be subjected to the scrutiny of a court of equity at the suit of the minority shareholders.”

And the case of N. W. T. Co. v. Beatty, L. R. 12 App. Cas. 589, is cited with approval. There, in considering a contract made between a director and the corporation, it was admitted to be voidable. It was, however, held that the vendor director had a right at a meeting of the shareholders to vote in favor of ratifying such contract and concluding such purchase, and that his conduct was not to be regarded as oppressive towards the minority of shareholders because he individually owned a majority of the stock; and the court says:

“To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action» is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interest, but that he must have acted with an Intent

to subserve some outside purpose, regardless of^the consequences to the company, and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the- opposite policy. This is no business for any court to follow.”

In the Gamble Case the corporation made a contract with Mullins, who controlled a majority of the stock of the corporation, by which he .undertook to build an extension of the company’s works, to be paid in stock and bonds of the company; and, in an action brought to restrain the carrying out of that contract, it was held that the court was not justified in granting such relief, where a majority of the stock had approved the contract, although Mullins, who had an interest in the contract, and who controlled the corporation, had voted in favor of the contract. On the Other hand, an instance in which a court would interfere at the suit of a minority stockholder was presented in the case of Farmers’ L. & T. Co. v. N. Y. & N. R. Co., 150 N. Y. 410 , 44 N. E. 1043 , 34 L. R. A. 76 , 55 Am. St. Rep. 689 . That was an action to foreclose a mortgage upon the New York & Northern Railway Company. The New York Central Railroad Company had purchased a majority of the stock and bonds of this company, and had thus obtained control of the directors. There was.default in payment of the bonds, and an action was commenced to foreclose the mortgage. The answer set up as a defense that the Central Railroad had acquired a majority of the stock, to secure its property, through a foreclosure of the mortgage for its own benefit, at a price much less than its true value; that this was rendered possible by its acquiring a majority of the stock of the company, thereby being able to control the affairs of the company, and to manage its business in collusion with its directors and officers, so that its obligations could not be met, or its default made good; that such acts on the part of the New York Central Railroad Company were fraudulent, and prohibited by the laws of the state. Upon the trial of the action the defendant offered evidence to prove this allegation, which was excluded by the court. This was held as error, and it was also held error for the trial court to refuse to find facts which tended to sustain this defense, which had been proved without contradiction; and the rule in regard to the obligations of a majority of the stock to the minority is thus stated:

“That any person or corporation authorized to, do so might have purchased the bonds of the New York & Northern Railway Company, and have rigorously enforced them by a sale of its property, there can be no doubt. They might also have purchased the stock of the- company, and thus have become the towners of both, and, while such owners, might have enforced the liability of the company upon its bonds, so long as they acted in good faith and their purpose was proper; but, when the New York Central & Hudson River Railroad Company purchased the stock ahd bonds in question, thus obtaining a controlling interest in the affairs of the New York & Northern' Railway Company, for the avowed purpose of destroying it, to serve a purpose entirely outside of that for which it was organized, and in hostility to it, it becomes clear that, as such stockholder, it owed a duty to the minority stockholders; that the law implied- a quasi trust upon its part; and that a court of equity will not aid in the destruction -of that corporation and a confiscation of its

property, although it held a majority of its stock and the required amount of its bonds.”

In Flynn v. Brooklyn City R. Co., 9 App. Div. 269 , 41 N. Y. Supp. 566 , Mr. Justice Cullen, delivering the opinion of the cotirt in an action brought by a minority of stockholders to set aside a lease of a railroad executed by the company of which he was a stockholder to another company, and which lease had been approved by a majority of stockholders of the company, said:

“But the plaintiff' is one of very many stockholders in the company—one of many interested in a common enterprise. In-the management of that enterprise, so far as its conduct is authorized by law, not his will or judgment, but the will and judgment of the majority, must control, even though he should be right, and the majority wrong in their judgment.”

And then, after citing from Gamble v. Queens County Water Co., supra, the learned judge continued:

“As already stated, the action of the Brooklyn City Railroad Company in leasing its road was within its corporate powers, and it cannot be said that the action of the stockholders in leasing their road at ten per cent, per annum, with the guaranty and privilege above recited, was ‘so far opposed to the true interest of the corporation itself as- to lead to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests.' ”

This case was affirmed by the Court of Appeals ( 158 N. Y. 493 , 53 N. E. 520 ), where the court, after stating the general rule that courts have nothing to do with the internal management of business corporations, and that whatever may lawfully be done by the directors or stockholders, acting through majorities prescribed by law, must of necessity be submitted to by the minority, for corporations, can be conducted upon no other basis, said:

“Corporate elections furnish the only remedy for internal dissensions, as the majority must rule so long as it keeps within the powers conferred by the charter. To these general rules, however, there are some exceptions, and the most important is that founded on fraud. * * * Action on the part of directors or stockholders, pursuant to a fraudulent scheme, designed to injure the other stockholders, will sustain an action by the corporation, or, if it refuses to act, by a stockholder in its stead, for the benefit of all the injured stockholders. ’ * * * When a contract founded in fraud is executed by the directors with a third party upon the express approval of a required number of stockholders, with the intention on the part of all concerned to defraud the nonassenting stockholders, and the scheme will naturally result in serious injury to them or to the corporation, a court of equity will set aside the fraudulent transaction and compel the delinquent parties to account.”

There is thus presented the distinction between the cases in which a minority stockholder can and cannot have the execution or performance of a contract, which the corporation has the power to make, enjoined, when approved by a majority. A determination by the majority is binding upon the minority of the stockholders unless there is evidence that the act complained of was ultra vires or fraudulent, so that there was an intention of all concerned, including the majority of the, stockholders, to defraud the nonassenting stockholders or the corporation, and that the scheme would result in a serious injury to them or to the corporation. To justify the interference of a

The learned counsel for the plaintiff insisted upon the argument that there was no consideration for this agreement. This is based upon an assumption that the claim made by the Central Company was made in bad faith, and for the purpose of being the foundation for a compromise, and that there was no real question involved as to the right of the Harlem Company to all of the money saved by the refunding of the bonds, and no real question in controversy between the two corporations. But this proposition cannot for a moment be sustained. That the eminent legal gentlemen who furnished opinions in favor of the Central Company should have expressed an opinion contrary to their views upon the construction to be given to this lease, for the purpose of creating a situation upon which a compromise could be had,’ is not sustained by a particle of evidence. A consideration of the lease itself satisfies us that the question was one of doubt, which might have resulted in a determination adverse to the Harlem Company. All of the evidence shows that there was a real question, which was insisted upon in good faith by the directors of both companies, and one that was eminently proper to be adjusted by a compromise. The relinquishment by the Central Company of its claim to be entitled to retain the whole of this interest was an ample consideration for the execution of the compromise agreement, and, upon this record as it stands, I think that the compromise was a fair one, and was for the benefit of the stockholders of the Harlem Company.

I think, therefore, that there was no justification for the interference of a court of equity; that the action of the stockholders of

It follows that the judgment appealed from must be affirmed, with costs. All concur.