
    The Continental Insurance Company and Others, Appellants, v. The New York and Harlem Railroad Company and The New York Central and Hudson River Railroad Company, Respondents.
    
      Corporations — compromise of a dispute between a lessor and a lessee railroad corporation, having in part the same directors, as to which is entitled to the benefit of a reduction in interest upon ills renewal of a mortgage debt — when the com.promise agreement is confirmed by a majority of the stockholders, fraud or ultra vires action must be shown to justify its being set aside at the suit of minority stockholders.
    
    The New York and Harlem Railroad Company in 1873 leased its railroad to the New York Central and Hudson River Railroad Company for a term of 401 years under an agreement by which the New York Central and Hudson Rivet-Railroad Company agreed to pay as rental eight per cent per annum on the par value of the capital stock and also the interest on certain bonds of the New York and Harlem Railroad Company. The existing bonds of the New York and Harlem Railroad Company, which became due in 1900, bore seven per cent interest, and as the time for their maturity approached it became evident that this bonded indebtedness could be refunded at a lower rate of interest. Each of the parties to the lease contended that it was entitled to the entire benefit which would accrue from the refunding of the bonds at a lower rate of interest and their respective contentions were supported by the opinions of eminent counsel. An action was brought to determine the question, and during the pendency thereof, at a meeting of the board of directors of the New York Central and Hudson River Railroad Company, a resolution was-adopted reciting that it was for the best interests of the company and the stockholders that there should be an amicable adjustment of the controversy, and a committee was thereupon appointed to negotiate with the New York and Ilarlem Railroad Company for such an adjustment.
    Subsequently, and on June 28, 1898, at a meeting of the directors of the New York and Harlem Railroad Company, at which there were present eight directors, three of whom were directors of the New York Central and Hudson River Railroad Company, a resolution was adopted which recited that whereas it was the opinion of the directors that it was for the best interests of the company and of the stockholders that the controversy should be amicably settled, it was resolved that a committee be appointed to negotiate with the New York Central and Hudson River Railroad Company for such a settlement. The resolution further recited that if the committee should reach an adjustment it should report the same to a meeting of the stockholders, provision for calling which was duly made.
    The committees from the two boards of directors met and reached an agreement providing for the refunding of the bonded indebtedness, the payment by the New York Central and Hudson River Railroad Company of an additional rental of two per cent per annum upon the capital stock of the New York and Harlem Railroad Company and that the New York and Harlem Railroad Company would not make any further claim against- the New York Central and Hudson River Railroad Company on account of the reduction in the rate of interest on the bonds.
    October 5, 1898, a meeting of the stockholders of the New York and Harlem Railroad Company was called for the purpose, as stated in the notice, of considering the proposed settlement. There were represented 157,561 shares out of the total capital of 200,000 shares of the New York and Harlem Railroad Company and of these 146,519 shares were voted in favor of the proposed settlement and 11,042 shares were voted against it. It did not appear that any fraud was practiced on the stockholders of the New York and Harlem Railroad Company or that the New York and Harlem Railroad Company, either by its directors or by a majority of its stockholders, has elected to rescind the agreement.
    
      Held, that the court would not set aside the agreement of settlement at the instance of a person who owned one-twentieth of the capital stock of the New York and Iliuiem Railroad Company;
    
      That a determination by the majority stockholders of a corporation is binding upon the minority stockholders, unless there is evidence that the act complained of was ultra vires or fraudulent, and, if the act is claimed to be fraudulent, that the majority stockholders were parties to such fraud and that it resulted in injury to the corporation or to the minority stockholders.
    Appeal by the plaintiffs, The Continental Insurance Company and others, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 8th day of July, 1904, upon the report of a referee, dismissing the complaint upon the merits.
    
      John G. Milburn, for the appellants.
    
      William B. Hornblower, for the respondents.
   Ingraham, J.:

This action was originally brought by the Continental Insurance Company as a stockholder of the New York and Harlem Railroad Company, on behalf of itself and all other stockholders of the Harlem Company similarly situated. Subsequently, by orders of the court, other stockholders of the Harlem Company were made parties plaintiff, so that at the time of the trial the plaintiffs were the owners of 10,150 shares of the stock of the Harlem Company. The total stock of the Harlem Company is $10,000,000, divided into 200,000 shares, the plaintiffs representing a little over one-twentieth of the stock of the company. The action was brought to have declared null and void an agreement made between the New York and Harlem Railroad Company and the New York Central and Hudson River Railroad Company, the plaintiffs as stockholders seeking to enforce a cause of action vested in the corporation, the directors after a request by the plaintiffs having refused to commence this action.

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 and 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 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 York. Prior to the year 1873 these two companies were operating their several lines of railroad, and on April first of that year there was executed and delivered an agreement, a copy of which is annexed to the complaint, by which the Harlem Company leased to the Central Company its railroad extending from Forty-second street, in the city of New York, to Chatham Four Corners, a distance of about 130 miles, for a period of 401 years from the 1st of April, 1873, the Central Company to pay as rent for the demised premises two dollars upon each share of the' capital stock of the Harlem Company on the first day of July and the first day of January in each year, the said amount being equal to eight per cent per annum on the par value' of the said cajiital stock ; to pay the interest on the bonds of the Harlem Company that were described in a schedule annexed to the lease as such interest should from time to time become due and payable ; and to pay the rent agreed to be paid by the Harlem Company to a railroad called the the New York and Mahopac Railroad Company, according to the terms and conditions of the lease of that road to the Harlem Company; and to pay all taxes, charges and assessments that might be imposed or assessed in any way on said railroad, branch or property, or any part thereof. This lease contained a provision that the authorized capital stock of the company, was $10,000,000, and no more, consisting of 200,000 shares of the par value of fifty dollars per share; and the Harlem Company covenanted that the schedule annexed to the lease contained a full and correct statement of its outstanding bonds, and as some of those bonds had not been issued it was agreed that the unissued bonds should be delivered to the Central Company, to be disposed of by it as provided for in the agreement, the agreement to pay interest on these bonds to apply to the bonds then unissued and which would be delivered to the Central Company. The lease also contained a covenant on behalf of the Harlem Company that it would not, during the continuance of the contract, “ authorize, create or issue any stock or bonds additional to the amounts thereof respectively now authorized or outstanding, as hereinbefore stated, except at the request or upon the demand of the said party of the second part, as hereinafter set forth.” The Central Company also agreed to pay the principal of all the bonds described in schedule “A,” other than the bonds therein described as “ Consolidated Mortgage, due May 1, 1900,” as they shall respectively mature and be presented for payment, “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 said 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, semi-annually, 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 case, 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 interest, 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 doing so may discontinue any part of the present way or track of said road or branch, and any of the machine shops or depots not 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 seven 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 thé 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 bonds were secured by a mortgage upon the Harlem road issued prior to the execution of the lease, and the lease of the Central Company was, therefore, subject to this mortgage. About the year 1896 the question of the payment of these consolidated mortgage bonds was considered by the directors of both corporations, and it was realized that as they became due on May 1, 1900, provision had to be made for their payment. Since the execution of this lease the rate of interest at which railroad bonds of this character could be sold had been materially reduced, and it was ascertained that bonds of the Harlem Company secured by a mortgage could be sold at a rate of interest much lower than that theretofore paid upon these consolidated bonds, and a question was then presented as to the rights of the respective parties to the amount represented by this saving of interest on the bonds. A prominent firm of bankers in New York were willing to purchase from the Harlem Company bonds secured by a mortgage upon its road with interest at three and one-half per cent, thus saving in interest the difference between three and a half and seven per cent per annum, or $420,000 per year. Mr. Henry II. Anderson, a prominent member of the New York Bar, who had been for many years the legal adviser of the Harlem Company, was requested by it to give his opinion as to the construction to be given to the lease, and in pursuance of that request, on March 17, 1896, he.addressed a communication to the president of the Harlem Company, stating as his opinion that under the provisions of the lease, as the Harlem Company was prevented from issuing any mortgage or incumbrance upon the demised property, except at the request of the Central Company, it was prevented from issuing bonds, secured by a mortgage, to take up the consolidated bonds; while under the lease, if it could pay off this consolidated mortgage without issuing any mortgage upon the demised propprty, it was at liberty to do so, in which event it would be entitled to receive the $840,000 per year interest that the Central Company had been paying upon the consolidated bonds; that under the lease the Central Company could, when it paid off these consolidated mortgage bonds, call upon the Harlem Company to issue bonds secured by a mortgage to take the place of the paid bonds, in which event the Central Company would be entitled to the bonds so issued, and upon using such bonds to pay off the consolidated bonds, the obligation of the Central Company would be to pay the interest on such substituted bonds. This opinion of Mr. Anderson was communicated to the Harlem Company, and in the meantime, on April 8, 1897, the Harlem Company had received a proposition from Messrs. J. P. Morgan & Go. and J. S. Morgan & Co. to purchase $12,000,000 of their new bonds, payable in 100 years and to bear interest at three and a half per cent per annum, such bonds to be secured by a mortgage on all the property and franchises of the company, excepting its city lines; it being understood that the new bonds and mortgage were to be subject to the approval of the counsel for the bankers. J. P. Morgan & Co. and J. S. Morgan & Co. at the same time made the same proposition to the Central Company in respect to the bonds of the Harlem Company in case the Central Company should be entitled to the bonds.

On the 14th of April, 1897, at a meeting of the directors of the Harlem Company, a resolution was passed which recited the lease between the Harlem Company and the Central Company, authoriz-. ing the president or officers of the Harlem Company to make a contract for the sale of the $12,000,000 bonds and to accept the proposition of the firms of J. P. Morgan & Go. and J. S. Morgan & Co., to purchase the bonds, and directing that a stockholders’ meeting be called to approve of such bonds and the mortgage to be given to secure their payment, which approval was subsequently given by the stockholders. On the 18th of May,-1897, a meeting of the directors of the Central .Company was called, and this action of the Harlem Company was presented to that meeting, whereupon the directors of the Central Company passed a resolution that the Central Company would pay these consolidated mortgage bonds at maturity, and calling upon the Harlem Company, under the terms of the lease, to make a new mortgage on the railroad property and to deliver the bonds secured thereby to the Central Company, and it was also resolved that the general counsel of the company be directed to retain and associate with him Ashbel Green and Edward J. Phelps for the purpose of beginning and prosecuting such action or actions as might be necessary to secure and protect the rights of the company, and notice of this action was given to the Harlem Company. Prior to this meeting there had been communicated to the president of the Central Company an opinion signed by Frank Loomis, the general counsel lor the Central Company, Ashbel Green , and E. J. Phelps, which construed the lease as giving to the Central Company the right to require the Harlem Company to execute and deliver to the Central Company new bonds secured by a mortgage on the same property, and that the Harlem Company had no right to issue bonds secured by a mortgage upon the demised property, and had no right to require the Central Company to pay the seven per cent upon the $12,000,000 of the consolidated mortgage bonds. Mr. Stetson, whose opinion as to the construction of the lease had been asked, had written a letter to Mr. Twombly stating that, under his construction of the lease, the Harlem Company had a right to issue bonds to the extent of $12,000,000, secured by a mortgage upon the demised property and with the proceeds thereof to pay off the consolidated mortgage bonds, and that the Harlem Company would then be entitled to demand of the Central Company seven per cent upon the sum of $12,000,000 in each year, and this opinion had been communicated to the directors of the Harlem Company and they had acted upon it in authorizing the bonds to be issued to take up the consolidated bonds.

This being the situation oh 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. Tims, on the 1st of May, 1900, $12,000,000 had to be provided for the payment of these consolidated bonds by the Harlem Company. The action to have a determination as to the rights of the respective parties under this lease had not been tried in the summer of 1898, and it was evident that this question could not be settled by a decision of the appellate courts prior to the time when the bonds would become due. The directors of the two companies had then to determine whether it would not be advisable in some way to adjust the differences by a compromise. The referee has found, upon evidence which is not substantially disputed, that both parties to this dispute acted in entire good faith in making the claim that they did, and has also found that there was a serious question as to which of the respective claims would be sustained. He has expressed his opinion that, upon a proper construction of the agreement between the respective companies, the contention of the Harlem Company was right and would have been ultimately sustained, a question upon which we do not express an opinion.

As, however, the offer to purchase the bonds of the Harlem Company was conditioned upon that company’s securing its bonds by a mortgage, upon all of its property that had been demised to the Central Company, which would be a first lien upon that property, it is apparent that the Harlem Company could make no new mortgage upon its property without the consent of the Central Company, except subject to the lease to the Central Company, and subject to the right of the Central Company to sell portions of the demised property, and it would seem that, assuming that the Harlem Company had the right to make a mortgage and to secure bonds that it had issued to take up the consolidated mortgage bonds, as that mortgage would have to be subject to the lease of the Central Company, the condition of the bankers upon which they based their offer to purchase the Harlem bonds could not be strictly complied with by the Harlem Company. Whether that would have affected the ability of the Harlem Company to sell its bonds does not appear from the record, but reading the 5th, 6th, 16th and 17th clauses of the lease together there certainly was presented a question that was not free from doubt as to which corporation was entitled to the saving of any interest which resulted from the refunding of these consolidated bonds, and the opinions given by the eminent counsels employed by the different companies, the good faith of which cannot be questioned, justified each of the companies in insisting upon the construction of the lease that it had been advised by its respective counsel was correct.

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 directors' of the Harlem Company, there being present eight directors, of whom three only were directors of the Central Company, a copy of these resolutions adopted by the directors of the Central Company was submitted to the meeting, and a resolution was passed which recited that, whereas it was in the opinion of the directors for the best interest of the company and the stockholders thereof that the uncertainty of litigation should be avoided, and that the advantage of an increase in the rental under the lease should be secured by an amicable adjustment of the differences between the two companies, and by which it was resolved that a committee be appointed to negotiate with the Central Company for the adjustment of the matters in controversy between the two companies under the lease of April, 1873, and it was further directed that if this committee should reach an adjustment it should report the same to a meeting of the stockholders of the company, provision for a calling which was made by a subsequent resolution, and a form of notice of this special stockholders’ meeting was adopted, which provided that a special meeting would be held for the purpose of submitting to the stockholders the final report of a Committee appointed by the Board of Directors of this Company to agree with the Board of Directors of the New York Central and Hudson River Railroad Company upon a settlement of the questions between the two companies arising out of the lease of April 1st, 1873, and the refunding of the Consolidated Mortgage Bonds of this Company, and for the purpose of taking final action with reference to such proposed settlement and agreement.”

In pursuance of this authority the committee of the two boards of directors met. They came to an agreement which was formulated into what was called a second supplemental contract, and which is the agreement sought to be declared void in this action. That agreement provided that the Harlem Company should issue its bonds secured by a mortgage on its property to retire the consolidated mortgage bonds, and that the Central Company should pay to the stockholders of the Harlem Company by way of rental under the lease of 1873, on the first days of July and January in each year, fifty cents per share on each share of the Harlem Company’s stock, being at the rate of two per cent per annum in addition to the amount of rent reserved by the lease, so that after May 1, 1900, the annual rent payable by the Central Company to the several stockholders of the Harlem Company should be equal to ten per cent on the par value of the capital of the Harlem Company; and the Harlem Company agreed that it would not make any further claim against the Central Company on account of the reduction of interest on their bonds. The committees appointed by the boards of directors of the two companies having thus agreed to a compromise of the question in dispute, a meeting of the stockholders of the Harlem Company was, pursuant to the resolution of the directors, called for the 5th. of October, 1898. There was sent with the call for the meeting to each stockholder a circular signed by the president of the company, which stated that the stockholders would receive a notice of a meeting of the stockholders to be held on Monday, October 5, 1898, for the purpose of considering the final adjustment and settlement of the differences between the Harlem Company and the Central Company growing out of the contract of lease of April 1, 1873; that arrangements had been made by which there would be a saving of interest on these bonds of $120,000 per annum; that counsel for the Central Company had advised that the Central Company Avas entitled to all of the interest saving effected by the refunding of the Harlem debt, and that on the side of the Harlem Company it was claimed, with the support and under the advice of competent counsel that the Harlem Company was entitled to the whole of the interest saving; that a litigation Avas then pending to determine that question, and the boards of directors of the respective companies had reached the conclusion that the common advantage would be promoted were each company to make a comjDromise. It was then stated that committees had been appointed by each company and that they had reached the conclusion that, it Avould be fair to adjust and settle the differences by adding two per cent to the annual dividend to be received by the Harlem stockholders, Avho thus Avould receive after May 1,1900, under the lease (and exclusive of their interest in the street railway property) annual dividends of ten per cent, instead of eight per cent as prior to that date; that this was $10,000 less than one half of the entire interest saving; and that the board of directors of the Harlem Company regarded that adjustment and settlement as desirable, and it was respectfully recommended to the acceptance and approval of all Harlem stockholders at their meeting which had been called for October fifth. This circular Avas signed by the president of the company, with a statement that a copy of the proposed second supplemental agreement which embodied this proposed compromise could he obtained on application at the office of the company.

This meeting of the stockholders of the ITarlem Company was held on the 5th of October, 1898. There were represented 157-;5(U 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 ITarlem 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 TIarlem 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 hoard of directors and the proper officers of the ITarlem 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 was objection made to the adoption of this resolution by the holders of about 10,000 shares of the stock of the company, and also by Hr. Trull, representing the original plaintiff in this action. A motion was made by a stockholder that the meeting be adjourned until December 7- 1898, which was submitted to the stockholders and was defeated. The polls, therefore, were declared open, to remain open until two o’clock r. m. to vote upon the resolution for the approval of this supplemental contract, and as a result of that poll, 146,519 shares of the capital stock of the company voted in favor of the resolution, 11,042 shares voting against it, and 42,439 shares not voting. In pursuance of this vote of the stockholders, the officers of the company executed the supplemental agreement which had thus been approved. Under it, the new bonds to take the place of the consolidated bonds were duly issued, and the consolidated bonds were retired. The Central Company has paid to the stockholders of the Harlem Company a dividend of two per cent a year in addition to the dividend required to be paid by the lease of 1873, and this dividend has been received by all or'substantially all of the stockholders of the company except the plaintiffs in this action.

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 wishes to avoid the agreement. The result of this agreement is to increase the dividends upon the stock of the Harlem Company two per cent per year. If this agreement should be avoided, the question as to whether the Harlem Company 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 Metropolitan Elev. R. Co. v. Manhattan R. Co. (14 Abb. N. C. 103), elaborately discussed the consequences resulting where contracts áre made between two corporations with common directors, and after a most thorough examination of the authorities his conclusion is thus stated: “ The principle is here recognized that the majority of the shareholders may ratify a lease made by the directors, and that a minority cannot disaffirm. 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, iu speaking of tlie 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 shareholder’s 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. Queens County Water Co. (123 N. Y. 91) 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 he subjected to the scrutiny of a court of equity at the suit of the minority shareholders.”

And the case of North-West Transportation 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 he 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 interests, 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' Loan & Trust Co. v. N. Y. & N. R. Co. (150 N. Y. 410). That was ail action to foreclose a mortgage upon the New York and 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 he 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 defendants 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 and 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 owners 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 and Hudson River Railroad Company purchased the stock and bonds in question, thus obtaining a controlling interest in the affairs of the New York and 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 it 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. R. Co. (9 App. Div. 269) Hr. Justice Cullen, delivering the opinion of the court 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 justice 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 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 interests.’ ”

This case was affirmed by the Court of Appeals (158 N. Y. 493) 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 in jure 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 in jured 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 non-assenting 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 non-assenting 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 court of equity, the majority of the stockholders must have been parties to a fraud which would result in an injury to the corporation or the minority stockholders.

In this case there is no evidence from which an inference can be drawn that the majority or any one of the stockholders who voted to approve this agreement was influenced by any motive except to do what was considered for the benefit of the corporation by accepting a compromise which -would be for its advantage, or that the compromise was' approved by the stockholders in pursuance of any scheme or device to cheat or defraud the Harlem Company or the minority of the stockholders; and in the absence of such evidence it was not within the province of a court of equity, at the suit of a minority stockholder, to determine whether its judgment agreed with the minority or with the majority. The learned referee has found that there was no fraud in the transaction, and that finding necessarily resulted from the evidence. But if it could be said that for any reason the contract was voidable, it certainly cannot be claimed that from anything that appears in this record it is void. Who, then, is to elect to rescind ? It must be the corporation who made the contract, or the majority of the stockholders who approved and authorized it. Certainly a minority of the stockholders cannot act for the corporation and rescind a contract authorized by the majority. The court has not power to rescind for the corporation. To rescind, there is needed the affirmative act of the corporation or its stockholders. In this case it is the minority that seeks to rescind against the wishes of the majority.

The learntid 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 ivas 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 the company in ratifying this agreement and directing the officers of the company to execute it was valid; and that the defendants were entitled to judgment.

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

Yah Brunt, P. J., McLaughlin and Laughlin, JJ., concurred.

Judgment affirmed, with costs.  