
    GAMBLE v. QUEENS COUNTY WATER CO.
    N. Y. Court of Appeals;
    
    October, 1890.
    
      [Reversing 52 Hun, 166.]
    1. Corporation; stockholder's rights; voting where personal interests concerned.] A shareholder has a legal right at a meeting of shareholders to vote upon a measure even if he has a personal interest therein, separated from that of other shareholders, as in such a meeting each shareholder represents himself and his own interests solely, and in no sense acts as a trustee or representative of others.
    
    2. Same ; case stated ] Hence a shareholder in a water company, who-has built an extension of the company’s works on his own responsibility and not under any contract with the company, has a right to vote at a meeting of the shareholders in favor of the company’s purchase from him of such extension. So held, although he was also a director.
    3. The same; protection of minority stockholders against oppressive action of majority.] To warrant the interposition of the court in. favor of the minority shareholders in a corporation, as against tbecontemplated 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 must have acted with intent to subserve some, outside purpose, regardless of the consequences to the company, and in a manner inconsistent with its interest.
    4. The same; company's purchase from stockholder ; value of property, how ascertained,.] In an action by a stockholder of a water company to enjoin its purchase of an extension of its works, built and owned by another stockholder, Held, that, in estimating the fair value of the property for the purpose of ascertaining whether such purchase was opposed to the interests of the corporation, so as to warrant the interposition of the court in favor of a minority stockholder, it was proper to take into consideration the value of the-owner’s labor and time in constructing the extension, although dur. ing the time he was engaged in building it he was an officer of the company; and that he had the right to demand a profit on his. work when he subsequently sold it to the corporation ; and that, the inquiry should be, what, under all the circumstances, is the-fair valúe of the property to the company, considering its proposed use by it and the general purpose for which the company is organized, and not merely the cost of the materials and the value of the-labor contained in and expended upon it.
    5. The same ; probableprospective value of property.] Possible or probable prospective value of property ordered to be purchased by a corporation at a meeting of its stockholders, from a stockholder, may be taken into consideration upon the question of fraud, and the actual good faith of the majority of the stockholders may be-decided, among other things, by a consideration of the reasonableness, or the reverse, of such expectation of future value.
    6. Manufacturing corpoi-ation ; issue of stock for property.] A corporation, subject to the provisions of the general manufacturing act (L. 1848, c. 40), cannot issue its stock in payment for property purchased by the corporation at anything less than its par value.
    
    
      1. The same ; issue of bonds at less than par value.] But such a corporation has the power to issue its bonds at less than par, and is not restricted to issue only on payment to the company of the par value of the bonds, either in money or property for its use.
    
      •8. The same ; payment for property in stock and, bonds.] But where property purchased by such a corporation is paid for, partly instock and partly in bonds, the company cannot evade its obligation to issue stock at its par value by the issue of bonds below par which are, in effect, added to the stock to give it a par value.
    '9. Corporation ; buying property with its bonds.] A corporation which is authorized by the act under which it is organized to borrow money for the purpose of constructing its works and to issue bonds for its payment, can purchase works already constructed and suitable for its purposes, and issue bonds in payment therefor. 
    
    10. The same.] Nor is it necessary that such a corporation in purchasing property should make the whole payment in stock, but it may issue stock for a portion and may pay in cash or issue bonds for the balance.
    Appeal by the defendants from a judgment of the .general term of the supreme court, for the first department, affirming a judgment entered after a trial at special term, perpetually enjoining the defendants from carrying out a resolution of the stockholders of the defendant corporation authorizing the issue of certain stock and mortgage bonds of the company for the purchase of an extension of the company’s waterworks from defendant Mullins.
    James Gamble brought this action against the Queens ■County Water Company, Robert F. Mullins, and others, for an injunction.
    The company was organized under L. 1873, c. 737, for the purpose of supplying water to the town of Hempstead, with a capital stock' of $40,000, divided into 400 shares of $100 each. After the construction of the water works for the village of Far Rockaway in said town, for which it issued its entire capital stock and $40,000 in bonds, its capital stock was increased to $50,000.
    The defendant, Mullins, who was then a director of the •company, in consequence of a general talk among the directors that it would be advantageous to the company to extend its works to the village of Rockaway Beach in said town, distant about five miles from Far Rockaway, and without any contract between him and the company for the construction of the works, went on and built such additional-works. After the w'ork was done, at a meeting of the stockholders of the company, at which the individual defendant and the plaintiff were present, it was voted by a majority of the stockholders in number and amount of stock to increase the capital stock to $100,000, and to issue $160,000 additional mortgage bonds of the corporation, and to pay over to defendant, Mullins, $60,000 of such mortgage bonds and $50,000 of additional capital stock in payment of the Rock-away Beach extension. The defendant, Mullins, voted in favor of the resolution for the purchase of the extension from himself. The plaintiff, who owned thirty shares of the stock, voted against the resolution and protested in writing against the purchase.
    The trial court also found that the actual cost of the Rockaway Beach extension was not more than $65,000, including about $8,000 paid to defendants Mullins and DuBois for services relating to the work while they were trustees and officers of the company ; that the bonds and stock voted in payment for the extension amounted in value to $110,000; that the actual net cost of the work to Mullins was less than $61,000, and it was not worth more than $85,000 in cash.
    
      The special term held that the statute did not authorize the corporation to issue its stock for an amount largely in excess of the cash value of property purchased, although the market value of the stock was less than par ; nor to issue its bonds except upon payment to the company of their par value, either in money or property, for the use of the corporation, or to secure actual bona, fide debts, and that, therefore, the company had no power to pass the resolution for the issue of $110,000 in its stock and bonds in payment for property not worth more than $65,000.
    From the judgment restraining the corporation from issuing its stock and bonds as proposed, the defendants -appealed.
    
      The general term affirmed the judgment, holding that the transaction itself showed a fraudulent design, the execution of which should be restrained by a court of equity "(Opinion reported in 52 Sun, 166).
    From the judgment of affirmance, the defendants took "this appeal.
    
      Wm. B. Hornblower (Hornblower & Byrne, attorneys), "for the defendants, appellants.
    
      James W. Perry (Knevals & Perry, attorneys,) for the plaintiff, respondent.
    
      
       See note at the end of this case
    
    
      
       See, also, Beckley v. Schlag (N. J. Ct. Err. July, 1890), abst. 42, Alb. L. J. 217.
    
    
      
       See L. 1890, c.564 § 2, cited post, on p. 435.
    
   Peckham, J.

The defendant corporation was organized -under the Laws of 1873, chapter 737, relating to the incorporation of water companies, as amended by chapter 214 of the Laws of 1881. The provisions of the general manufacturing act of 1848, and its amendments, as to payment for -capital stock, were made applicable to corporations formed under the act of 1873.

The so-called Eockaway Beach extension was not built "by defendaut Mullins under any contract with the defendant corporation. The plaintiff requested the' court to find that he did so build it, but the court refused" the request, ■and in the opinion delivered by the learned judge at the trial term, it is distinctly stated that there was no contract between the parties for the building of such extension. Upon its completion Mullins was the sole and absolute owner thereof, with power to operate it himself or to sell it to ■others, or, in brief, to exercise such acts of ownership over the property as any other owner might have exercised. This is not the case of a trustee entering into a contract with himself or purchasing from himself, where the contract is liable to be repudiated at the mere will or even whim of the cestui yue trust. Having the rights of an absolute owner of this ■extension, Mullins was at liberty to make such contract in regard to its disposal as he should see fit, so long, of course, us he did not, while acting in his own interests on the one side, also act on the other in the capacity of trustee or representative, so that his interest and his duty might conflict.

In this case Mullins did not so act. He bases his right to the stock and bonds of the company defendant upon the vote of the majority of its shareholders, taken at a regularly ■convened meeting, to purchase the property at the price named in the resolution adopted at such meeting, the price being $60,000 in bonds and $50,000 in the stock of such ■company. At this meeting four hundred and ninety-seven out of a total of five hundred shares, into which the capital •stock of the company was divided, were represented, and four hundred and sixty-seven shares were voted upon in favor of the adoption of such resolution, while the thirty of the plaintiff were yoted upon by him in opposition thereto, :and three shares were not voted upon. There were a majority of shareholders and a majority of shares voted upon, in favor of such resolution, without counting the defendant Mullins or his shares, although he voted upon them in favor ■of such resolution. In so doing he committed no legal wrong. 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 a 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.

These views are exemplified in the comparatively recent English case of North Western, etc. v. Beatty (L. R. 12 App. Cas. 589), where one of the directors in a company contracted with his colleagues to sell to the company a vessel which he owned, for a price named. The contract was,, in fact, a fair one, but it was admitted to be voidable, and it was 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. It was said that a resolution of the majority of shareholders, upon any question with which the company was competent to deal, was valid and binding upon the-minority. A voidable contract, it was also said, might be ratified or affirmed by a majority of shareholders at a proper-meeting, provided that such ratification was not brought about by improper means, and the contract itself was not fraudulent or oppressive towards the minority. Baggallay, L. J., said that great confusion would-be introduced into the affairs of joint stock companies, if the circumstances of shareholders voting in that character in general meeting were to be examined and their votes practically nullified if they also stood in some fiduciary relation to the company.

I think that where the action of the majority is plainly a fraud upon, or, in other words, is really oppressive to the minority shareholders, and the directors or trustees have acted with and formed part of the majority, an action may be sustained by one of the minority shareholders suing in his own behalf and in that of all others coining in, etc. to enjoin the action contemplated, and in which action the corporation shall be-made a party defendant. It is not, however, every question. of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally the rule must be that in such cases the will of the majority shall’ govern. The court would not be justified in interfering, even in doubtful cases, where the action of the majority might be susceptible of different constructions. 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 tlie 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 tlse 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.

I do not understand that these views are substantially drawn in question in the courts below, but there are facts found in this case upon which they have thought the plaintiff was entitled to their interference in his favor, to prevent the consummation of the action of the majority in providing for the issuing and delivering to Mullins of the stock and bonds mentioned in the resolution adopted by the shareholders. So far as fraud may be made the basis for an action like this, it is to be noted that there is no finding by the court that any fraud existed in fact, or that the individual defendants, or any of them, were actuated by any fraudulent intent in taking the action which they did. Therefore, if the action is to be sustained on the ground of fraud, its existence must be the necessary legal inference from facts which have been found. But the trial court made certain findings of fact from which the general term has inferred the existence of this fraudulent purpose, and to which findings an exception was taken by defendant, Mullins, upon- the ground that there is no evidence to support them. A question of law is thus raised which this court is called upon to decide. These findings and exceptions relate to the actual cost of the Bockaway Beach extension.

The court found that such actual cost was not more than the sum of $65,000, including about $8,000 paid to defendants Mullins and Du Bois for disbursements and services rendered by them in relation to the work, while they were officers and trustees of defendant corporation. It was further found that the actual net cost of the work to defendant Mullins was less than the sum of $61,000, and that the work, as completed, was not worth more than $65,000, while the corporation, by the terms of this resolution, was to pay Mullins for the doing of such work in bonds and stock to the amount in value of $110,000. The evidence is uncontradicted in regard to the cost and worth of these works.

It was shown that the actual expenditures for the work amounted to $69,055.79, which included labor and cost of material. There were also included in such gross amount $8,000 for the personal services of Mullins and Du Bois, both of whom were, at the, time when they did the work, officers and directors of the corporation defendant. Also, an item of $1,300 for four months’ interest .on $65,000, thus making a total of these items, for personal service and for interest, of $9,300, which, when deducted from the above total of $69,055.79, leaves a balance of $59,755.79, and upon this basis the finding of the court that the actual net cost of the work to Mullins was less than the sum of $61,000, may be sustained. But why should the $8,000 for the personal ■service of Mullins and'Du Bois be deducted ? The deduction is claimed upon the ground that while Mullins was engaged in the work of building this extension, he and Du Bois were ■also officers of the corporation defendant, and therefore it is ■assumed that neither had any right to charge such company for his services. I see no rule of law which forbids such charge, nor is there any in the nature of the transaction itself. When Mullins engaged in the business of building the extension, lie was under no contract with the company to build it for them. He was free to build it in such manner and at such -expense as he chose, and when completed he was free to make such use of it as he chose, to keep it or to sell it to others. As he did not do the work for the company, he was not bound to give his time or labor to the work and to make no ■charge for it, if he subsequently sold the work, as completed, to the company. There is no reason whatever why such -charge for his personal service should not enter into the legitimate and proper cost of the work. The same may be ¡said of the charge for the services of Du Bois. He- was ■employed by Mullins to do certain necessary work in connection with the extension, and Mullins had the perfect legal right to include the amount due Du Bois for such services as a part of the cost of the extension. There is no claim made' that the amount of either item is excessive, in case it was proper to make the charge and include it in the alleged -cost of the work. The same can be said of the charge for interest on the $65,000. It is, in any event, and in regard to all these items, a mere means of arriving at a fact, viz.: the actual cost of the work, for the purpose of seeing hereafter what kind of a bargain was made by the company defendant in its purchase. The question is, do these items legitimately ■enter into the cost of the work and so form a part of its value ? On that question it seems to me there can be no doubt.

In arriving at an answer to the other proposition, as to the fair value to the company of the property purchased, or, in other words, in coming to a conclusion as to what kind of a bargain was obtained for the company by this purchase, it is proper to scrutinize the evidence going to show the value of the completed work, and for that purpose the various-items,given by Mullins maybe examined. We arrive at the-conclusion that the items already criticised were properly included as a part of the actual cost of the work to the contractor, and that he was fully justified in treating with the-company and the company with him on the basis of the-actual cost of the work being $69,055.79. This, of course, gives not a penny of profit to the contractor. So far as Mullins was concerned, and in regard to his holding an official position in the company, he had the same right to demand a. profit on his work when he subsequently sold it to the corporation defendant that he had to charge for his personal services as a part of the cost of the work. As he did not do-the work as agent of the company, or oversee it in his capacity of trustee or director thereof, but, on the contrary, as he-did the work for himself wholly and at his own risk, his position in the company, up to the time of the actual sale of it, had no effect upon his work on the extension or his right, to realize a profit thereon. Of course, when he came to sell it to the company, if the sale were made by him as vendor to the directors, he being one of them and acting as such, the sale was a voidable one, liable to be set aside at the suit of the company and possibly at the suit of a shareholder. But we have seen that this was not the way in which the sale was made. Mullins did not act in his capacity of director at any meeting of the board, but he voted as a shareholder to make the purchase, at a meeting of the shareholders, under the circumstances already mentioned. Profits upon the work were, therefore, a proper item to be considered when looking-at the question as to what kind of a bargain the company defendant really made. Upon this subject there is no dispute if profits are to be allowed at all. Doing this work where there is risk arising from the necessary laying of the-pipes under water, a contractor would want the equivalent, of $80,000 to $85,000 in cash. In this amount from 10 to-15 per cent, would be estimated for profit, but it might be •only five, and it might be nothing. It was of an objectionable character of country to put pipe in, swamp and salt meadow, as shown by the witnesses for plaintiff.

While showing the actual prices paid for some of the material, it was proved by Mullins, when called as a witness by the plaintiff, that he had obtained about six hundred tons of eight and four-inch cast iron pipe in January, but when lie came to use it in April the price had gone up about §4 per ton. which would enhance the actual cost of the work, if thus charged, some §2,400. In making up the account •of the value of such work, a fortunate purchase of a part of the material used in its construction is proper to be taken into consideration.

It is plain that the court, in finding that the work as completed, was not worth more than §65,000, failed to take into consideration many items entering into the actual cost •of the work, and upon the assumption of such actual cost, the court below chiefly based its finding of the completed value of the work. In truth, all the items already mentioned should have been included. When viewing the completed work and endeavoring to place some value upon it, we are not to be confined to the mere cost of the materials and the value of the labor contained in and expended upon it. A fair profit to the contractor is to be included, and the inquiry should be what, under all the circumstances, is the fair value of the property to the company, considering its proposed use by it, and the general purpose for which the company is organized. This seems to be the rule derived from the cases of Schenck v. Andrews, 57 N. Y. 142; Boyton v. Andrews, 63 Id. 94; Lake Superior Iron Co., v. Drexel, 90 Id. 87, in which the suits were brought by creditors of the corporations. Looking at the case in this light, it can be said that, from the uncontradicted evidence, it clearly appears that the cost of the completed work to the •contractor (including his fair profit) was at least eighty or eighty-five thousand dollars. The trial court, in finding to the contrary, made a finding which is wholly unsupported by the evidence. The finding proceeds upon a wrong theory,, and is arrived at by excluding from the computation items, which should properly have been considered. But this is. the mere value to the contractor, while the true question is what is the value to the company ?

In answering that question the trial court should take: some other and additional facts into consideration.

It must be remembered that the defendant corporation was organized for the purpose of supplying water to villages, within the town of Hempstead. The evidence shows that it had completed its work so as to supply the village of Far Bockaway, within such town. Bockaway Beach was another-village in the same town, about seven miles distant. It was one of the villages included in the charter powers of the defendant company, and it may, therefore, be said to have: been within the contemplation of the members of the company to supply such village with water. The company finds-this extension ready made to its hands, with pipes laid, risks-successfully encountered, and all work done, so that nothing-is wanting but the purchase and taking possession of the. property, in order to at once enter upon the work of supplying this village with water, which is, as I have said, one of the purposes for which the company was organized. The: question which at once confronts the company is, would it be good policy to refuse to purchase at the price named ($110,000), with not only the possible, but the very probable, contingency of seeing a portion of its own legitimate field of operations occupied by some rival, either to its own entire exclusion, or else under circumstances where it would be-obliged to compete for business ? It- might be that the company could well afford to pay such price, considering the.prospective profits to be derived from supplying the village.witli water, and the driving out of any competition with it in such work. Any court maturely considering all tliese> facts, and taking all the circumstances into consideration, might reasonably come to the conclusion that the value of this property to the company defendant was the sum of $110,000.

The court below has not ■ passed upon this question. After taking all these matters into consideration, and if, after doing so, it should find that the value of the property to the company was the last named sum, then, of course, all basis for maintaining this action would be at an end.

But if, after a critical examination of the facts, the court should find the value of the property, at the time of the proposed purchase, to have been but eighty or eighty-five thousand dollars, the vote to pay the sum above stated in stock and bonds is not to be condemned as a fraud unless the majority acted in bad faith. Possible or probable prospective value of property thus ordered to be purchased at a shareholders’ meeting, may be taken into consideration upon this question of fraud, and actual good faith in the majority shareholders might be decided, among other things, by a consideration of the reasonableness, or the reverse, of such expectations of future value. This is not the case of a creditor seeking satisfaction from a shareholder because of the unlawful issue of stock under the provisions of the manufacturing statute, such as the cases above cited were ; and in order that the minority shareholders should be able to successfully attack the action of the majority in such a case as this, something more must be shown than that the property purchased was not of the full value of the stock or bonds issued at par in payment therefor. A discrepancy as large as that between $80,000 or $85,000 and $110,000 is not necessarily a fraud. The court would have to find the further facts already stated in this opinion as necessary to exist, before such action should be enjoined.

From these views it may be that no question will arise upon another trial as to the power of the company to issue its stock or bonds at less than par. It might be, however, that the findings of the court upon the questions of value would be such as to necessitate the decision of that question» and we think it proper, therefore, to state the conclusion to which its examination has brought us.

We think that, under the manufacturing act, the company cannot issue its stock as full paid at anything less than its par value. The act makes special provision for the exercise of the power to issue stock in payment for property purchased by the company. Whatever the right of a corporation under the general powers pertaining to it as a corporation might be, we must look at the provisionseof the statute, where it specifically grants such power, to find the terms and conditions upon which it is to be exercised. By section 2 of chapter 40-of the Laws of 1848, the trustees of a manufacturing corporation, founded under the act, are empowered to purchase property necessary for their business, and to issue stock to the amount of the value thereof in payment therefor, and the stock so issued shall be declared and taken to be full paid stock, and not liable to any further calls. We think this language must mean that the amount ■of the nominal or par value of the stock must be put against the value of the property purchased. Otherwise, we should have such a case as $100 in cash purchasing $1(. 0 of stock at par, under a subscription to the capital stock of the company, while the same hundred dollars, if first turned into property to be sold to the company, might purchase double the quantity of the stock, if the stock were only of the actual value of fifty per centum of its par value. The stock would issue only at its actual value in return for property, but in return for cash, it could only issue at its par value. In other -words, if the stock were really worth but fifty per cent, of its par value, actual cash would purchase only half as much stock as could be purchased with an equal value in property. This was never meant. And I think the expression that the stock thus issued for property purchased is to be taken as full paid up stock, and that it is to be issued to the amount ■of the value "of the property purchased, must mean that it is to be issued at its par value.

It may be said that this construction prevents a corporation from purchasing property and paying for it with its ■ stock, where actual value of the stock is enough below its par value to make the difference in a large purchase very ■appreciable. That maybe so; but it was undoubtedly the ■object of the statute to make the full paid capital stock that is issued the representative, dollar for dollar, of the money ■or property that has been paid in for its purchase, so that 'the company would start off in business with money or property of the full value of its paid up capital.

The learned counsel for the appellant cites the case of Van Cott v. Van Brunt (82 N. Y. 535), as conclusive upon the point under discussion. But we do not agree to that ■statement. The Van Cott case related to a railroad corporation which was. organized under a statute which does not ■contain this provision as to purchasing property. It was decided that it had the right, under the general powers of •■a corporation, to procure the building of its road and pay for the construction of the same by the issuing of stock and bonds, and that it might issue such stock at its actual value, •even though it were less than its par value. But where the provision as to the purchase of property is expressly stated, ■and the condition mentioned, a fair construction must be .given such language, even though it curtail the power of a •corporation as to the issuing of its stock. The provision in the general railroad act, chapter 282, section 16. of the laws" ■of 1854, making each stockholder liable individually to the creditors of the company, etc., until the whole amount of the capital stock shall have been paid to the company, is not, as we think, the equivalent of the language used in the manufacturing act, and hence stock in a railroad corporation may be regarded as fully paid when issued at its actual value in payment for the building or equipping of the railroad. The language is used in reference to the liability of stockholders, and the section is silent upon what shall be regarded as paid-up stock, while the section of the manufacturing act clearly contemplates, as it seems to us, that"only the amount of the stock as named in the scrip is to he-issued to the amount of the value of the property, and is-then to be regarded as full paid stock.

A different rule, however, prevails in regard to the bonds-of a corporation. An extended discussion of the qnestío» is not needful. We think a corporation has the power to-issue its bonds at less than par. So far as this point is concerned, it is not restricted to an issue only upon payment'to-the company of the par value of the bonds, either in money or property for its use. The case of Duncomb v. N. Y., H. & N. R. R. Co. (84 N. Y. 203), does not hold any principle: to the contrary. It was there decided that the bonds gives-the director as a mere bonus, on his subscribing to the stock,, were without consideration, and the director, as a trustee of the company, had no right to receive them, and, therefore,* in his hands they were void.

The principle decided in Curtis v. Leavitt (15 N. Y. 1), gives validity to bonds thus issued. The repeal of the-statute of usury, so far as regards corporations, operates to-give validity to bonds negotiated at less than par. The ease-of Ellsworth v. St. Louis, A. & T. H. R. R. Co. (98 N. Y. 553), also impliedly holds that bonds thus issued are valid.

But the court might hereafter, possibly, find these i'a$tey. viz.: that the company, at a meeting of shareholders, resolved to purchase property of the value of but $80,000, to pay for it by the issuing of stock of the par value ©f" $50,000, and bonds of the par value of $60,000. Holdings as we do, that the stock must be issued at par, in order to-pay only the balance of $30,000 of the purchase price,, tibe$60,000 of bonds would be issued at 50 per cent, only of their par value, while it may be assumed that their aetasal' value was 95 per cent, thereof. Would the issue of sueíi a®, amount of bonds, under such circumstances, be enjoined as, a fraud upon the minority % Considering the fact that the-; stock must be issued at par, the company must, therefore^, receive in money or property the equivalent of its face- or par value, and unless it does so receive it, the issue is-illegal. Under these circumstances, the issue of almost twice the number of bonds, taken at their actual value,, necessary to pay the balance due on the property purchased,, such issue being made, in fact, because the stock was really worth not more than 40 per cent, of its par value, would be, as it seems to me, a mere evasion of the statute as to issuing-stock at par, and ought not to be tolerated any more than any other evasion of the statute, no matter for what purpose-such evasion was attempted. If the facts assumed were to-be hereafter really found, the issue of the bonds should then, be enjoined.

The plaintiff’s counsel makes the point that the company-defendant was not authorized to issue its bonds for the purpose mentioned. It is authorized, by section 5, of the act under which it was organized, as amended by chapter 213-of the Laws of 1881, to borrow money for the purpose of constructing its works and to issue bonds for its payment. Is is altogether too narrow a construction of the statute to-hold that the corporation must itself construct the works,, and may not purchase works already constructed, and tit and suitable for its purposes. Nor do we think that in purchasing property the corporation, if it intended to issue stock in payment, must make the whole payment in stock. It may issue stock for a portion, and may pay in cash or issue bonds-for the balance.

From these views it results that the judgment in this action must be reversed and a new trial ordered, costs to-abide event.

Note on the Right of the Holders of the Majority of Stock in a Corporation to Act in Their Own Interest as Against Other Stockholders.

One is often called on now to advise on the conversion of a-partnership into a corporation, or on the rights arising out of contracts made by large stockholders affecting the course of' corporate acts or management.

The case in the text is of great importance in its bearing on all questions of this class because it clears up the confusion which has been left by many of the previous decisions overhanging the distinction between the limits which the law imposes on officers, against acting in their own interest, and those, which it imposes on stockholders. The result is briefly this : That if an officer acts in his own interest, the corporation •or any dissenting stockholder can avoid the act or claim the benefit of it for the corporation, whether the corporation was injured or not (see 20 Abb. N. C. 431) ; but a stockholder who is not an officer is free to act in his own interest provided he does not act clearly against the company's interests.

This principle marks a strong contrast between the law of corporations and that of partnerships.

In a partnership each member is the fiduciary agent of all the others in all the matters within the scope of the business, unless the articles expressly restrict his powers. One partner has all the power that any other has, and within the scope of the business, all the power that all have together. There is no voting, and no legal prerogative conferred on a majority. In one sense, a majority of members may control; or the heaviest contributors of capital may control; but when they do this it is not because of paramount legal authority, but by the concession or acquiescence of the others.

In a corporation a single share more than half the stock has .a legal right to elect the entire go veri ng board ; and the law vests in the govering board the entire legal control of the ordinary affairs of the company.

In a partnership each member who gets any private advantage out of the affairs of the firm without the assent of his co-partners holds the result as a trustee for them. If he makes ventures on his own account in the line of the firm business .and under cover of its facilities, they are entitled to share the profits. If he gets in his own name a renewal of a lease the firm held, the others may claim it for the firm. He is to the full extent of the partnership relation a trustee for them.

If they organize as a corporation this quality of their relation is subverted if not wholly terminated. The partner as such is a mere shareholder. It is true that if he accepts a place in the board, he acts there in a sense as a trustee for the •corporation in its entirety, including, of course, the interest of other shareholders ; but if he is only a shareholder, he is free to deal for himself, and the mere fact that his dealings are such .as to give him an advantage over the interests of his corporation, does not necessarily give the corporation a right to object; much less give aright to his fellow shareholders.

The decision in the text in effect sanctions many classes of contracts which are in general nse in corporate business, and doubtless are found on the whole to promote the success of' such business, but which have been deemed by many obnoxious; to the more stringent rules applicable to those who are officers or directors and acting as such in the name of the corporation.

The reader should not overlook the recent legislation bearing somewhat on these questions, which affects all stock companies, exclusive however of moneyed corporations,” which is understood to mean corporations having banking powers, or having the power to make loans upon pledges or deposits, or authorized by law to make insurances. L. 1882, p. 6G0, § 214.

The question whether there should not be some further restriction placed upon the power of the majority, is one that, is now receiving much attention, and several plans have recently been formulated for this purpose. Those who. are interested in looking beyond the actual condition of the law into these possibilities, will be interested in the mention below of the chief proposals. It is enough to say here that if any substantial change in the law be desirable in that direction, one of the simplest and one most in harmony with existing methods, would be the creation of a second governing board, to consist of those having the minority vote at the usual election,, and the adoption of a provision that sales and leases of the corporate property, and permanent or continuous contracts,, beyond the current engagements necessary in the ordinary business of the company, should not be valid unless adopted by. both boards. Perhaps lesser powers would be enough.

Notes of Cases, eta.

I. Notes of decisions on the powers of a majority of stock,

II. Recent legislation.

III. Proposals of further measures.

I. Notes of decisions on the powers of a majority of stock.

Stipulation for office.] In West v. Camden (U. S. May 10, 1890), 8 Railway & Corp. L. J. 114, it was held that a contract between a. trustee of the Standard Oil Company who was about to become as its representative the principal stockholder, and expecting to be president of a new local company to be incorporated, and a person selling out his, oil business to the new company, that the seller should be vice-president of the new company at a large salary, was void as against public; policy.

The court in its opinion does not clearly discriminate between thepromissor’s duty as director, and his duty as stockholder, and his duty •as trustee of the beneficial owner of the stock which stood in his name; and perhaps the conclusion is to be regarded as based on the fact that the contract was intended to bind his conduct as trustee for the beneficial owner of the stock and as president and director, and that a different rule might be applicable had he been merely the absolute owner of the stock.

The court below, whose judgment was affirmed, said: “ There is no allegation or proof that there was at any time such a contract for permanent employment directly with the company, or that the existence of such a contract with defendant was known to all the stockholders of the company; so that it resulted, if the contract be upheld, that whenever the question of retaining the plaintiff in the company’s service at $5,000 a year came to be voted on, the defendant’s vote was to be influenced by the fact that he was to be liable to the plaintiff in large damages unless the company retained him. Either the company must pay him $5,000 dollars a year, or the defendant must make it good to him out of his own pocket. This state of facts serves clearly to bring the case within the principle of the ruling in Fuller d. Dame, 18 Picio. 472, and Guernsey v. Cook, 120 Mass. 501; that is to say, it was a contract the purpose and effect of which was to influence the defendant as a stockholder and officer of the company, ‘ in the decision of a question affecting the private rights of others, by considerations foreign to those rights.’ . . . We think this salutary rule is applicable in this •case, notwithstanding the alleged contract was not corruptly made for private gain on the part of the defendant. There were other stockholders in the company. The defendant and the Standard Oil Company, for whose benefit it is alleged the contract was made, were not all the stockholders, and it seems to us that it was certainly the right of those other stockholders to have the defendant’s judgment, as an officer of the company, exercised with a sole regard to the interests of the company.”

The supreme court, in affirming the judgment, add: “ From the plaintiff’s own testimony it appears that his only reliance was on the "use of the defendant’s influence as an officer of the Baltimore United Oil Company, and on his control over the stock in that company held by the Standard Oil Company. . . . The agreement alleged to have been made was one on the part of the defendant, whereby he might be required to act contrary to the duty which, as an officer of the Baltimore United Oil Company, he owed to that company and to the stockholders other than the plaintiff. ... It amounted to a stipulation on the part of the defendant that no contingency should happen which should require a change of management and a reduction of expenses. . . .

We think this principle [condemning such contracts] is equally ■ applicable on the ground of public policy, although there was not to be ■any direct private gain to the defendant; for as was said by the circuit ■ court in this case, it was the right of the other stockholders in the Baltimore United Oil Company “ to have the defendant’s judgment, as an •officer of the company', exercised with a sole regard to the interests of the company.”

Brewer v. Boston Theatre, 104 Mass. 378. A bill alleging that certain defendants owned a majority of the stock in a corporation in which plaintiffs were stockholders, and that they were fraudulently conspiring to lease the property in fraud of plaintiffs’ rights, and that the directors were aiding and acquiescing in such action, held, on demurrer, maintainable; and held, that it sufficiently showed that no redress could be obtained through the corporation or its directors, and therefore ¿neither the lessees nor all, nor a majority of the directors were necessary parties.

Meyer v. Staten Island Ry. Co. (N. Y. Supm. Ct.) 7 State Rep. 245. 'Plaintiff stockholder alleged that one W., an officer and stockholder in plaintiff’s corporation, by the use of large sums of money and fraudulent methods, obtained the ratification, by a majority of the stockholders, • -of a lease of the corporate property to another corporation, of which W. was a member, which was irresponsible and merely speculative; and .that the transaction was calculated to injure the rights of the stockholders of the leasing company, and had for its object the practical ab- ■ sorption of such company by the other, in 'which W. was specially Snterested, and for the interests of which he was working prejudicial ■ io the leasing company.—Meld, reversing a decision sustaining a demurrer to the complaint on the ground (apparently) of generalization . ;and obscurity of statement, that a cause of action was set forth; and -that if the charges were substantiated, the lease could not be maintained.

Combination.] Barr v. New York, L. E. & W. R. Co., 96 N. Y. 444. Plaintiffs, stockholders of a railway corporation, brought suit in equity .€or injunction and accounting, alleging a corporate lease to defendant, 51. Co., that lessee made default in payment of rent, and thereafter it purchased a majority of the stock of the lessor, and then caused its officers to be elected officers of lessor; and that they refused to pay the sent, and denied its liability, and conspired to compel the lessor’s other ‘stockholders to sell the stock at less than value ; that the lessor’s property was being controlled in disregard of the rights of the other stockaolders; that E. Co’s, property had since been sold on foreclosure to defendant, N. Co., which, with its officers, was now controlling the leased coad; and that they had failed to keep any account of the leased road’s earnings.—Reid, "affirming an order reversing an order sustaining a demurrer to the complaint, that the suit was properly brought in equity, directly against N. Co. and its officers, as it prevented a multiplicity of' suits; the allegation of a conspiracy obviating the objection that the-different companies should have boon sued separately, on the ground that they were liable for different portions of the rent ; and, in the light of such combination, the refusal of the officers to sue being no. obstacle to the suit by the stockholders.

Sale.] Ervin v. Oregon Ry. Nav. Co., 27 Fed. Rep. 625. A majority of stockholders combined and sold the corporate property at a sacrifice to another corporation organized by themselves, and dissolved1 the old corporation.—Reid, that the majority occupied a fiduciary relation toward the minority, and were bound to account to them for their proper share of the property; and that the minority had an equitable lien on the property.

Banks v. Judah, 8 Conn. 145. A manufacturing corporation voted by a majority of its members to sell its property, which was purchased’ by one or its stockholders for such other members as should pay their proportion of the debts and the purchase money ; and a large majority of the stockholders formed a new company, assumed the debts, and paid the purchase money. Plaintiff, a minority stockholder, waited ten years before seeking relief, when he filed this bill in chancery.— Reid, that while the sale was void, because a majority of stockholders, acting as agents or trustees for all, were both buyers and sellers,—yet plaintiff’s laches precluded him from obtaining equitable relief; and that if he had any remedy, it was in a court of law. The court therefore dismissed the bill, but without costs.

Taylor v. Earle, 8 Hun, 1. A minority stockholder, has a right to. object to the sale by the majority of the stockholders, of all the property of the corporation made for the purpose of closing its active prosecution of the business for which it was formed. In this case the-majority of the stockholders of a manufacturing corporation sold the entire plant to a foreign corporation, taking in payment stock of that corporation.—Reid, that as the object was not a sale properly so. called, but a mode of transforming a domestic corporation into a foreign one the act was voidable at suit of a minority stockholder.

Expenses of another corporation.] Alexander v. Searcy, (Ga.) 8 S. E. Rep. 680. One corporation, owning a majority of the stock of" another, expended large sums in equipping and operating the latter, and improving it, and for a period.of from seven to fifteen years the other, stockholders stood by and, with full knowledge that all the majority stock was voted, and of all that took place, raised no objection.—Reid,.. that they were thereafter estopped from bringing their bill for -injunction, for alleged mismanagement, because of such acts in which they had acquiesced, and that an injunction was improperly granted,— especially as plaintiffs, owning only four hundred shares as against six thousand owned by defendant, showed no other effort to obtain redress - v / Jk as by the allegations it appeared that defendant obtained its stock under a full and fair agreement; and held, that after so long a time, the plaintiffs could not inquire into the question whether it was legal for defendant corporation to own and vote the stock.

Voting trust.] Moses v. Scott, 84 Ala. 608. Certain stockholders in a joint stock company entered into an agreement with each other whereby they transferred their stock to trustees to be voted as a unit, in any way three-fourths of the trustees might determine, or, if they failed to determine, as a majority of the stockholders might determine; and a transferee of stock was to have no right to vote it. One of these stockholders then agreed to sell his stock to a third person, who refused to accept unless he could vote on the stock. On the seller’s bill for specific performance of the contract to buy, and injunction against the transferee voting the purchased stock, held, that the first agreement was a palpable restraint on the power of alienation, and specific performance must be denied.

Legislation.] Converse v. Hood, (Mass. 1889) 4 L. R. A. 521. On a bill brought by minority stockholders to enjoin the corporation from carrying on, and the majority stockholders from voting for a certain kind of business, held, that the allegations that by so doing the corporation would infringe the rights of another corporation, and expose itself to litigation therefor, were insufficient to maintain the bill. “ Whether the corporation will run the risk of such litigation is plainly a matter for the majority, and not for the minority of its stockholders; to determine. ”

Menier v. Hooper’s Telegraph Works, 9 Ch. App. 350. A bill by-minority stockholders, alleging that the majority had stopped an appeal by the company in a suit,against another corporation, and proposed to sell the property to such other corporation, and praying to have the other corporation declared a trustee for plaintiffs, of the profits arising from the stopping of the appeal, and to restrain the sale of the property, —Held, maintainable, and demurrer overruled.

Alteration of charter.] After a subscription became due, the corporation charter was so changed as to superadd another business, and authorize additional expenditure therefor.—Held, in a suit for the amount of the subscription, that defendant was not bound by the act of the majority in ratifying the alteration in the charter, and that the alteration absolved him from all liability on his subscription ; and the court rendered judgment for defendant, over a consent. Hartford & N. H. R. Co. v. Croswell, 5 Hill, 383.

Livingston v. Lynch, 4 Johns. Ch. 573. Three persons signed an association agreement, fixing the amount of stock, each to have a proportionate vote, and giving each a right to dispose of his shares as he saw fit—but no heir or assign to have any control until the death of the contracting party from whom he derived his shares. The profits were paid directly to each party, according to his proportionate share. They afterwards unanimously passed resolutions changing the amount of capital stock and providing for the mode of payment of profits.— Held, that it was not a partnership, but the parties were tenants in common. Such resolutions were the fundamental articles, or constitution of the company, and could not be superseded by a majority of the stockholders; and that a minority stockholder could have an injunction against a method of running the business different from that prescribed by such resolutions, although authorized by subsequent pretended resolutions passed by a majority of the stockholders.

Kean v. Johnson, 9 N. J. Eq. 401. Plaintiffs alleged that they were stockholders in a corporation, in which, and in another corporation, the defendants were majority stockholders and directors; that the legislature passed an act supplemental to the incorporating act of the plaintiffs’ corporation, authorizing the other corporation to purchase the former’s road, “Provided, that nothing in this act contained shall in anywise affect any right whatever, either at law or in equity, of any stockholder ” in plaintiffs’ company.—Held, by Cortland Parker, Master, on demurrer to a bill for injunction against a sale by defendants, the majority, that the sale could not be had without consent of plaintiffs and all the stockholders, and demurrer overruled.

Release of subscriber.] An attempt to release a stockholder from his contract by the general manager of a corporation, who is also its largest stockholder, secretary and treasurer, on the stockholder’s request that he would dispose of his stock, whereby he causes entries to be made on the books charging off the balance due for unpaid calls, and crediting to the stockholder the sums paid by him, will not avail to release the stockholder where no attempt is made to transfer his shares, although the manager secures new subscriptions to the stock in place thereof, and both parties suppose that he is authorized to substitute new subscriptions and release the old ones. Cartwright v. Dickinson (Tenn.) 1890, 7 Law R. Ann. 706.

The court say :■ “The contract of shareholders is a mutual one. Without the consent of all, one cannot be released from liability.”

Alteration of voting power.] A regulation of a corporation that .stockholders shall have one vote for each share held by them up to ten shares, and fixing the proportion which his votes shall bear to his shares above that number, is a reasonable regulation, uniform in its operation, conflicts with no law, and is binding on all the shareholders. Detwiller v. Comm. ex rel. Dickinson (Pa. 1890), 7 Law R. Ann. 357.

The court say: “When the methods of voting are not fixed by •general law, the corporators may make the law for themselves,” but not in conflict with law.

II. Recent legislation.

§ 2. “In addition to the powers conferred by the general corporation law, every stock corporation [except moneyed corporations, § 1] shall have power to borrow money or contract debts, when necessary for the transaction of its business, or for the exercise of its corporate .rights, privileges or franchises, or for any other lawful purpose of its incorporation; and may issue and dispose of its obligations for any amount so borrowed, and may mortgage its property and franchises to secure the payment of such obligations or of any debt contracted for the purposes herein specified; and the amount of the obligations issued and outstanding at any one time secured by such mortgages, excepting mortgages given as a consideration for the purchase of real estate, and mortgages authorized by contracts made prior to the time when this act shall take effect, shall not exceed the amount of its paid up capital stock, or an amount equal to two-thirds of the value of its corporate property at the time of issuing the obligations secured by such mortgages, in case such two-thirds value shall be more than the amount of such paid up capital stock.- No such mortgages, excepting purchase-money mortgages, shall be issued without the written consent, duly acknowledged, of the stockholders owning at least two-thirds of the stock of the corporation, and such consent shall be filed and recorded in the office of the clerk or register of the county where it has its principal place of business. When authorized by such consent the -directors, under such regulations as they may adopt, may confer on the holder of any debt or obligation secured by such mortgage, the right to convert the principal thereof, after two and not more than twelve years from the date of the mortgage, into stock of the corporation; and if the capital stock shall not be sufficient to meet the conversion when made, the stockholders shall, in the manner herein provided, authorize an increase of capital stock sufficient for that purpose.” L. 1890, p. 1067, c. 564, “ Stock Corporation Law ;” to take effect May 1, 1891.

By section 24, if bonds or other obligations of the corporation, secured by mortgage, are issued in excess of the amount authorized by law, or in violation of law, the directors voting for such over issue, or unlawful issue, shall be personally liable to the holders of the bonds or other obligations illegally issued, for the amount held by them, and to all persons sustaining damage by such illegal issues for any damage caused thereby. L. 1890, p. 1070, c. 564, § 24, “Stock Corporation Law.”

“ No corporation shall issue either stock or bonds except for money, labor done, or property actually received for the use and lawful purposes of such corporation, at its fair value, and all stock issued in violation of the provisions of this section shall be void.” Id. p. 1073, §42.

“No stockholder shall sell his vote, or issue a proxy to vote, upon any stock or bonds to any person for any sum of money, or anything of value. Any person offering to vote upon stock or bonds shall, if required by any inspector of election, or any stockholder present, take and subscribe the following oath : ‘ I do solemnly swear that in voting at this election I have not, either directly, indirectly, or impliedly, received any promise, or any sum of money, or anything of value, to influence the giving of my vote or votes at this meeting, or as a consideration therefor ; and that I have not sold or otherwise disposed of my interest in or title to any shares or bonds in respect to which I offer to vote at this election, but that all such shares and bonds are still in. ray possession, or subject to my control.’ ” Id. p. 1077, c. § 54.

In “ Business Corporations,” a vote of half the stockholders may extend the business within one year from the incorporation. I. 1890, p. 1170, c. 567, § 8. Consent of two-thirds may change the principal place of business. Id. § 9.

Mr. Eugene D. Hawkins, in a paper on the Rights of Minority Stockholders, (Prize Essay N. Y. State Bar Asso., Weed, Parsons & Co., Albany, 1890) in which, however, he considers chiefly the abuses of powers of directors, suggests legislation entitling a dissenting -stockholder to have his stock appraised and purchased from him. He says: V This principle of compensation should, in my opinion, be extended to every case of what is, as a matter of fact, a fundamental change in the corporate business, including leases, additions of other kinds of business and substantial increase or decrease in the size of the corporate enterprise. ■

“ More adequate and summary protection from other ultra vires acts would be afforded minority stockholders, if the charters of corporations designated more specifically the powers conferred both upon the majority and the directors. If the right .of visitation were extended, so as to compel corporations to exhibit their affairs to State boards of •commissioners, and to apply to them as well as to a majority of the •stockholders before exercising any unusual authority conferred by the charter, the minority stockholder would be safer than if, alone, he were •obliged to fight his battle against the majority.”

Such a provision has been adopted in the “Business Corporation Law,” L. 1890, p. 1172, § 14, as to consolidation (to take effect May 1, 1890).

As to railroad companies consolidation and leases, see L. 1890, ■c. 565, p. 1104, § 71 (2) and § 78, requiring a two-thirds vote.

III. Proposals of further measures.

Mr. Daniel S. Resisen, also of this city, in a paper before the same association, and in an opinion which has been printed, has examined in detail the practicableness of Minority Representation. He suggests a method of election, intended to secure to each party of stockholders, representation in the board of management in proportion to the number of shares on which they vote. This method involves (1.) the ability of a stockholder to concentrate the entire voting power of a ■single share on one candidate for office; and (2.) means for the stockholder to ascertain in advance the number of votes to be cast at the ■election, and the number entitled to elect one representative in the board. This means of knowledge, in the absence of a statute, would be provided by by-laws, regulating the manner of conducting the election and requiring the stamping of ballots with the number of votes ■allowed to each, and the ascertaining and declaring the total number of 'votes before the ballots are actually deposited.

The ability to concentrate the voting power is provided by statute where the cumulative system of voting is allowed. In his view, also, where a charter simply gives the stockholders one vote for each share, the corporation may, in the absence of a provision to the contrary, provide that that vote shall be a single vote for a single candidate. 
      
      See the act of J890, quoted in note at the end of this case.
     