PITNEY, V. C
(Syllabus by the Court.)
Bill by Frank N. White and George R. Bidwell against the Thomas Inflatable Tire Company, H. W. Sheibley, Amos W. Thomas, and John C. Sullivan for an injunction and other relief. Heard on pleadings and proofs in open court Decree for complainants.
The other facts fully appear in the following statement by PITNEY, V. C:
White, and there was evidence tending to show that before he made the purchase he had notice of the substance of the trust-voting agreement, but this was denied by him. The time fixed for the annual election of directors was early in October, 1892, and on the 30th of September, 1892, this bill was filed, setting out the agreements by which the stock was issued in trust to Sheibley; alleging that the same were void, as against public policy, and were revoked by the sale by Thomas of his trust certificates, and the issuing of the 17,000 shares of treasury stock to the complainants; and praying that the defendant Sheibley might be restrained from voting at an election of directors on any shares of stock held by him according to the directions of the defendant Thomas, and that Thomas be restrained from nominating directors to be voted for by Sheibley, and that the trust contained in the agreements may be declared to be terminated, the agreements canceled and set aside, and Sheibley directed to transfer to the complainants the shares of stock held by him, represented by the trust certificates, and, in the alternate, that complainants, instead of Thomas, may be held entitled to nominate a minority of the directors to be voted for by Sheibley. On the filing of this bill an injunction was issued accordingly. The Thomas Inflatable Tire Company, Sheibley, and Sullivan answered jointly, admitting the facts set up in the bill, and alleging that the contracts were valid, and should be enforced, and further setting up that the complainants desired to get control of the company for an improper and unjustifiable purpose. The defendant Thomas answered by himself, setting up the same defense, and, by a cross bill, setting up that the fifty-odd thousand shares of trust certificates were obtained from him by the complainants by fraud, and asking that the sale be set aside. The cause was brought to hearing on these pleadings. No proof was offered in behalf of this allegation of the cross bill, or of improper motive on the part of complainants. The cause was heard upon the question of the validity of the trust-voting contracts as against the complainants.
Grey & Grey and Mr. Freedley, for complainants. C. A. Bergen, for defendant Thomas Inflatable Tire Co. Howard Carrow, for defendant Thomas.
E. O. Mitchenor, for defendants Sheibley and Sullivan.
PITNEY, V. C, (after stating the facts.) The complainants advance three propositions: First, that the original contract by which a minority of stock was given the perpetual right to elect a majority of the directors, and thus control the affairs of the company, was contrary to public policy, and for that reason void; second, that, conceding the contract to be valid and binding between the original parties so long as only 83 per cent. of the stock was issued, it nevertheless became nugatory and void as against the holders of the 17 per cent. of new stock as soon as that was issued; third, that in any view of the case the holders of the majority of the fifty-odd thousand shares of trust certificates once issued to Thomas have the right to dictate to the trustee the names of the four directors which, by the agreements, were to be nominated by Thomas. The last proposition was not seriously disputed by counsel for the defendants, as, indeed, I think it could not be. The agreements provided for trust certificates to be issued by the trustee, and they were made transferable on the books of the company by the trustee, and a provision was made for the issuing of new trust certificates in place of any assigned and surrendered. Trust certificates were issued accordingly, and of these nearly all those issued to Thomas have come to complainants' hands, and, with such possession and ownership, the right to nominate the directors. This point was distinctly ruled, after full discussion and consideration, in the cases of Bostwick v. Chapman and Starbuck v. Trust Co., known as the "Shepaug Voting-Trust Cases," reported in 60 Conn. 576. See pages 580, 587, 24 Atl. 34, at pages 39, 40. There, as here, a large majority of the stock of a corporation was standing in the name of a trustee in pursuance of an agreement entered into by the original owners of the stock to the effect that the trustee should vote upon it as directed by three certain persons named. Trust certificates were issued, as here, which were negotiable, and a majority of them came into the hands of the complainants. Upon a bill filed in equity by them, the court enjoined the trustee from voting, except as directed by the holders of the trust certificates, and also that the stock should be distributed by the trustee among the holders of the trust certificates. In the course of its opinion the court uses this language, in which I fully concur: "it is the policy of our law that an untrammeled power to vote shall be incident to the ownership of the stock, and a contract by which the real owner's power is hampered by a provision therein that he shall vote just as somebody else dictates is objectionable. I think it against the policy of our law for a stockholder to contract that his stock shall be voted just as some one who has no beneficial interest or title in or to the stock directs, saving to himself simply the title, the right to dividends, and perhaps the right to cast the vote directed, willing or unwilling, whether it be for his interest, for the interest of other stockholders, or for the interest of the corporation, or otherwise. This I conceive to be against the policy of the law, whether the power so to vote be for five years or for all time. It is the policy of our law that ownership of stock shall controlparty of the other part? How shall he choose out of the different holders of trust certificates the proper persons to nominate the majority, and who to nominate the minority of the directors? For it seems clear enough that new certificates, when issued, are freed, in the hands of their holders, from any burden in equity which attached to them in the hands of the former owner. If the answer to these questions results in the destruction of the ingenious scheme of these gentlemen, such result will be owing to their desire to adopt the machinery of a stock company, and thereby avoid personal liability for their contracts. They must take the burdens with the benefits of such organization.
But I do not find it necessary to answer these questions, or to determine whether the transfer of certificates in this case has gone so far as of itself to end the contest, since I have come to the conclusion that the second position taken by the complainants is sound. The contracts in question were not made a part of the certificate of organization, or incorporated into the by-laws. Nor, in my judgment, did they or could they be fastened upon or in any wise affect the 17,000 shares of stock issued directly to the complainants: and I think this is so whether the complainants had or had not notice of these contracts, since they did not enter into or form part of the contract between the company and the complainants as holders of the new stock. As such holders, they were entitled to have the other shares of stock in the company stand upon an equal footing, and to have the affairs of the company managed by a board of directors elected according to law, by a majority of all the stockholders. Unless, as the holders of the new issue of stock, they had such right, they would be deprived of a valuable right belonging to their stock, viz. the right to combine with other stockholders to elect a majority of the directors. In fact, they would be deprived of all voice in the management of the company, and of the right which each stockholder has to the benefit of the fundamental and salutary rule that the best interests of the minority are found in a rule by the majority. In my judgment the issuing of this stock was a waiver and abandonment by the directors, who united in issuing it, of their rights under the contract in question. The futility of the notice of these contracts alleged to have been given to complainants before they subscribed for the 17,000 shares of stock will appear when we consider the effect of a transfer of them to new parties. Such new parties would not be charged with such notice, and their rights would be undisputed. Should relief be denied the complainants in the present action, it would be but a postponement of the time when this voting trust must end. I will advise a decree for complainants.