Opinion
No. 4909.
Argued February 9, 1961.
Decided April 4, 1961.
1. A bill in equity by minority stockholders against the corporation and a majority of its directors alleging wrongs to the corporation resulting from fraud and mismanagement on the part of the directors giving rise to liquidation is maintainable as a derivative action on behalf of the corporation by the plaintiffs representing themselves and other stockholders.
2. Ratification and approval of the acts of the defendant directors by vote at a stockholders' meeting was no bar as a matter of law to the maintenance of a minority stockholders' suit alleging fraud and gross mismanagement by the defendant directors where such vote was allegedly taken without knowledge of material facts and adopted with the aid of the votes of the director-stockholders whose conduct was under attack.
3. However, where the bill was dismissed as to certain plaintiffs and others withdrew so that a single plaintiff remained to prosecute the action who by his own sworn statement sought no compensation for damages caused to his pro rata interest in the corporation, justice did not require the maintenance of the bill merely to vindicate the rights of other stockholders who might be eligible to sue but did not choose to join as parties plaintiff.
4. Dismissal of a bill in equity prosecuted by a single minority stockholder for reasons relating to the right of the stockholder rather than the corporation would not bar subsequent derivative actions by other stockholders qualified to maintain such a bill.
BILL IN EQUITY, by minority stockholders of Nashua Textile Co., Inc. against the company and three of its five directors, one of whom is its president, alleging gross mismanagement on the part of the individual defendants pursuant to a concerted plan to bring about liquidation of the company in order to avail themselves of a profit on their investment as stockholders. The bill, which was filed on February 5, 1959, sought to enjoin liquidation of the company and to require the individual defendants to account for losses resulting from their mismanagement and to pay damages to the company.
The company was organized in 1949 upon an original investment of $100,000 and thereafter engaged in the manufacture of textile products in Nashua. Until 1958 its operations showed a profit and its earned surplus increased by some one-half million dollars. In 1958 however it suffered substantial losses approximating $80,000. In that year and thereafter there were twenty-three stockholders, most of whom held both preferred and common stock in varying proportions.
The five stockholders named as plaintiffs all voted against liquidation of the company at a special meeting of the stockholders held on February 7, 1959 pursuant to a notice dated January 30, 1959. Two of them were joined as plaintiffs as the result of misunderstanding and they were immediately withdrawn as parties at their own request. The bill was later dismissed "with prejudice" as to two other plaintiffs, by order of the Superior Court entered December 23, 1959, in consequence of their failure to submit themselves for depositions. The sole remaining plaintiff was the named plaintiff, William Bowker, who has been a director since organization of the company and holds 122 out of the 961 shares of outstanding preferred stock, and 272 out of the 1961 shares of outstanding common stock.
The holdings of the individual defendants amount in the aggregate to 186 shares of preferred and 921 shares of common stock. The fifth director, who was not a party but voted with management at the February meeting, held 92 shares of preferred and 242 shares of common stock.
On February 9, 1959 the plaintiffs sought a temporary injunction which was denied on February 20, 1959 after hearing before Grant, J. The records of the defendant company received in evidence at this hearing disclosed that as early as May 23, 1958 the board of directors, including the plaintiff, had voted to reduce operations, sell substantial portions of the inventory, and to consider sale of a part of the machinery. At meetings in August, September and October, 1958, the directors unanimously voted to discontinue the salaries of officers and directors as of November 30, 1958, to authorize the president to sell finished and unfinished goods, certain machinery, and the right to use the corporate name, and finally to sell all of the assets at a fixed price approximating $500,000. On December 20, 1958, the plaintiff voting in the negative, the directors authorized acceptance of offers of $175,000 for the machinery and equipment. On January 14, 1959 payment of certain indebtedness was authorized, and the president was given conditional authority to "run out" the stock in the mill.
It further appeared that at the stockholders meeting of February 7, 1959, at which all stock was represented, a plan of liquidation was approved by affirmative vote of all of the stock except 21.1% of the common stock and 27.5% of the preferred which was held by the plaintiffs and voted in the negative.
By an identical vote the following resolution was also adopted: "RESOLVED that the policies and actions of the directors and the President during and since the fiscal year 1958, in reducing the scope of operations, turning inventories into cash, paying off long term indebtedness, seeking purchasers of the business as a going concern, canvassing the market for the machinery and real estate, and making the announcement of January 26, 1959, as to discontinuing manufacturing, be and are hereby ratified and approved."
By their answer filed March 3, 1959, the defendants denied the allegations of mismanagement and pleaded that the plaintiff's bill stated no cause of action. The answer also pleaded laches, waiver and estoppel, and ratification and approval by the plaintiffs of the defendants' conduct in managing the corporation.
On November 4, 1959 the deposition of the plaintiff Bowker was taken. In the course of his deposition Bowker was highly critical of management, but declined to state that the defendants whose conduct he criticized were "dishonest." He testified that his reason "for pursuing this litigation" was "a matter of principle" and that "damages of some sort should be paid to the stockholders outside of [the individual defendants], and I waive them for myself, I don't want any of them, but I think the others ought to have them."
On February 4, 1960 the defendants moved to dismiss, alleging that the sole remaining plaintiff Bowker had "waived any claim for damages" and that "no person or stockholder remains who can legally prosecute this action." After hearing by Grant, J., the motion was granted on February 20, 1960, subject to the plaintiff's exception. His bill of exceptions was allowed and transferred by the Presiding Justice.
Sheehan, Phinney, Bass, Green Bergevin and Richard A. Morse (Mr. Morse orally), for the plaintiff.
McLane, Carleton, Graf, Greene Brown (Mr. Graf orally), for the defendants.
The affirmative action of better than seventy per cent of all the stockholders of the corporation authorizing liquidation and dissolution of the corporation was sufficient to comply with the statute (RSA 294:40, 41) and if taken in good faith afforded the minority stockholders no ground for complaint. Bowditch v. Jackson Company, 76 N.H. 351; Second Nat. Bank v. Bank, 84 N.H. 342. See Fontheim v. Walker, 282 App. Div. (N. Y.) 373, aff'd 306 N.Y. 926; 6A Fletcher, Cyc. Corporations (Rev. Vol. 1950) s. 2947, pp. 692, 693; 13 Id., (Rev. Vol. 1961) s. 5797, pp. 129, 130.
The pending bill however is grounded upon fraud and mismanagement preceding and giving rise to liquidation, and thus alleges wrongs to the corporation itself. An action upon such a cause may be maintained by a stockholder, in equity, when the officers of the corporation refuse to act in its behalf or where, as in the case before us, those having the duty to act for the corporation are themselves charged with the wrongs of which complaint is made. March v. Eastern Railroad Co., 40 N.H. 548; Winsor v. Bailey, 55 N.H. 218. See Kidd v. Traction Co., 72 N.H. 273, 282; Allen v. Newmarket Associates, 95 N.H. 121. In such a case one or more stockholders acting in a representative capacity may, if not disqualified by participation in the wrong or for other cause, maintain a derivative action on behalf of the corporation.
Thus the plaintiff was entitled to maintain the pending action, unless it was barred by the confirmatory action of the majority stockholders, or unless he himself was disqualified to act to enforce the rights of the corporation.
The defendants rely upon the resolution adopted at the stockholders' meeting of February 7, 1959, ratifying and approving the action of the directors and president, as a bar to maintenance of any action, at least by those who voted in favor of the resolution. The plaintiff on the other hand points out that in order for such action by the stockholders to be binding upon them as a ratification, or as a waiver of their rights, it must have been taken with knowledge of the material facts. Durfee v. Durfee Canning, Inc., 323 Mass. 187, 202-203. This he asserts was not the case, either when he himself participated in the preliminary actions of the directors looking to liquidation, or when the majority stockholders adopted the resolutions of February 1959.
Also significant is the circumstance that the vote of ratification was adopted with the aid of the votes of the defendant stockholders whose conduct was under attack. In this situation the vote should not be effective to bar the rights of the corporation as a matter of law. Braunstein v. Devine, 337 Mass. 408. Cf. Solomont Sons Trust, Inc. v. New England Theatres Operating Corp., 326 Mass. 99.
If the plaintiff's allegations are true, then the stockholders of the corporation also have been damaged to the extent that the value of their stock has been diminished by reason of wrongs done the corporation. It is well settled however that a complaining stockholder may not maintain a derivative action in equity unless he himself has been injured. 13 Fletcher, Cyc. Corporations (Rev. Vol. 1961) s. 5948. "He sued originally because he was being injured. Otherwise he would have had no right to bring the suit." Hornstein: Legal Controls for Intracorporate Abuse, 41 Colum. L. Rev. 405, 428. Neither may he maintain his action if he has acquiesced in the wrong done the corporation, or waived his right to object thereto. Johnson v. King-Richardson Co., 36 F.2d 675 (1st Cir. 1930); 13 Fletcher, supra, as. 5862, 5868.
The plaintiff relies upon the fact that he voted against the ratifying action taken by the stockholders, and asserts that to the extent that he participated as a director in the conduct of which he now complains, he did so in ignorance of material facts (Therrien v. Maryland Cas. Co., 97 N.H. 180) and should now be permitted to maintain the bill.
Aside from those stockholders who have since waived their rights by withdrawing as parties plaintiff, and those as to whom the bill has been dismissed, no stockholder has joined with the plaintiff to prosecute the bill. Hence the defendants contend that the plaintiff was properly denied a right to prosecute his action, in equity, solely to enforce his own rights, in view of his express declaration under oath that he sought no damages on his own behalf.
Admittedly the corporation is now in the process of liquidation. Any recovery which might be afforded in the pending action would therefore be distributable to the stockholders; and equitably the circumstances might be thought to call for pro rata distribution among those stockholders only who had not participated or acquiesced in any wrong found to have been done. 13 Fletcher, supra, as. 5953, 6028; Samia v. Central Oil Co. of Worcester, 339 Mass. 101, 122-124; Bailey v. Jacobs, 325 Pa. 187, 208; Brown v. DeYoung, 167 Ill. 549. See Developments — Multiparty Litigation, 71 Harv. L. Rev. 875, 946-950; annos. 16 A.L.R. 2d 467, 494; 167 A.L.R. 279, 298.
It cannot be said as a matter of law that the Trial Court abused its discretion in finding that equity did not require trial of the complex issues presented by the bill solely for the purpose of determining the liability of the defendants to one who by his own sworn statement sought no compensation for damages suffered. Johnson v. King-Richardson Co., 36 F.2d 675 (1st Cir. 1930) supra; Babcock v. Farwell, 245 Ill. 14, 41. "There is no right to an adjudication of matters not in contention." Conway v. Water Resources Board, 89 N.H. 346, 349. As was said in Barrett v. Smith, 183 Minn. 431; 443: "Where a record shows that none of the complainants of record have any right to relief, the court cannot grant relief to those unnamed persons on whose behalf it is claimed the suit is brought." See also, Record v. Trust Co., 89 N.H. 1, 8; Foster v. Mansfield, Coldwater c. Railroad, 146 U.S. 88.
The order of dismissal had the effect of abating the plaintiff's action. It would constitute no bar to a bill subsequently brought to enforce a corporate right by another stockholder not disqualified to maintain it by reason of acquiescence, waiver or estoppel. Liken v. Shaffer, 64 F. Supp. 432, 442 (D.C.N.D. Iowa 1946). See Clarke v. Greenberg, 296 N.Y. 146, 149-150; Roberts v. Kennedy, 13 Del. Ch. 133. Justice therefore did not require that the plaintiff be permitted to maintain the bill merely to vindicate the rights of stockholders who might be eligible to sue, but did not choose to join as parties plaintiff. Accordingly the order is
Exception overruled.
All concurred.