The opinion
Dissenting Opinion by
Mr. Justice Linn :
I cannot concur in the majority opinion because in my judgment it extends beyond reasonable limits the scope of the rule binding the courts not to interfere with the internal management of the affairs of a solvent business corporation. In
Republican Mountain Silver Mines v. Brown,
58 Fed. 644, 647 , the rule was stated as follows by Thayer, J.: “Corporations are in a certain sense legislative bodies. They have a legislative power when the directors or shareholders are duly convened that is fully adequate to settle all questions affecting their business interests or policy, and they should be left to dispose of all questions of that nature without applying to the courts for relief. A stockholder in a corporation cannot successfully invoke the powers of a chancery court to control its officers or board of managers, or to wrest the corporate property from their charge through the agency of a receiver, so long as they neither do nor threaten to do any fraudulent or ultra vires acts, and so long as they keep within the limits of by-laws which have been prescribed for their governance. If in either of the cases last specified a stockholder is nevertheless dissatisfied with the business policy that is being pursued, or the methods of corporate management, he must seek redress within the corporation, in the mode prescribed by its charter and by-laws, rather than by an appeal to the court.” Our prior decisions have applied that rule:
Hlawati v. Maeder-Hlawati Co.,
289 Pa. 233 , 137 A.
235; Hall v. City Park Brewing Co.,
294 Pa. 127, 133 , 143 A. 582 ; compare
Schipper v. Economy Coal Co.,
277 Pa. 356 , 121 A. 193 . The record shows no fraud, no
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ultra vires act and no violation of any by-law. In this state in which general equity jurisdiction is subject to some statutory limitation
(Whyte v. Faust,
281 Pa. 444 , 127 A. 234 ;
Cella v. Davidson,
304 Pa. 389 , 156 A. 99 ) it is important that the scope of the rule should not be extended.
When the case was here before we said: “We have, then, a solvent corporation conducting a manufacturing business that has been very successful. Half the shares are held by the plaintiff and half by Sweet [Sweet’s Laboratories, Incorporated]. If each half-interest continues to oppose the other, the business will of course stop.”
The Business Corporation Law provides a remedy for such contingency which plaintiff invoked by his amended bill. Instead of applying the remedy, the learned court below, in substance, took charge of the business management in a vital particular, and by a method, I think, which disregards the rule that a court should not interfere where the questioned act is not fraudulent, ultra vires, or in conflict with by-laws.
The facts, stated in the prior opinion, need not be repeated, but it may be said that when plaintiff and Sweet united their interests by creating Gum, Incorporated, they provided for equal shareholding; we assume that plaintiff did so because he thought the contribution by Sweet would be in his interest; Sweet became half owner in the corporation for the purpose of obtaining a customer for its product which was the base out of which chewing gum is made. A part of the agreement was that Gum, Incorporated, would purchase from Sweet all the base it required. This agreement to unite their interests, made in 1930, was carried out informally until May, 1932, when the corporation was formed. Mr. Bowman testified that the agreement to buy the chewing gum base from Sweet was conditioned that “the quality of your base will always be equal to that of any other base, and also your price will always be fair.”
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On June 7, 1932, the following resolution was adopted by Gum, Incorporated: “RESOLVED, That all contracts for supplies of chewing gum base shall be made with Sweets Laboratories, Inc., and all purchases of said chewing gum base shall be made from said Sweets Laboratories, Inc.
“RESOLVED, That no contracts or purchases of materials or supplies of any kind be made without the approval of the Board of Directors.”
When dissension came in 1936 it was centered on a request by the plaintiff’s half interest addressed to the half interest of Sweet that the price of base should be reduced. Sweet replied that the price could not be reduced because the base could not be produced for sale at less, and that Gum, Incorporated, was charged the same price as other customers paid Sweet for the same base. There was no breach of contract in the sense that Sweet was charging Gum, Incorporated, more than it charged any other customer.
There, then, was the issue on which the two interests were deadlocked. Who was to decide between them?
There is nothing illegal about the contract consummated by the union of their interests in corporate form. It was a term of the contract that each half interest should do whatever was lawful in the enjoyment of that half interest. Motives are immaterial so long as the act is lawful. Compare
Rosenblum v.
Rosenblum, 320 Pa. 103 , 181 A. 583 . The court should enforce what the parties agreed to.
The conflict leading to litigation was precipitated in a board meeting by a resolution,
1
the terms of which in
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dicate that the plaintiff’s half interest sought to determine for the corporation what its management should do. The Sweet half interest resisted and voted against the resolution and, as the vote was a tie, the chairman of the meeting declared the motion lost.
When the parties got into the court below the second time, instead of proceeding with the trial of the case pursuant to the order made when the case was here before, a rule was granted on the defendants on September 28, 1936, “to show cause why a preliminary injunction should not issue enjoining the further purchase by Gum, Inc., its officers and agents of Chewing Gum base from Sweet’s Laboratories, Inc., and directing Gum, Inc., its officers and agents to purchase Chewing Gum base from the Dreyfuss Company.” I understand that on that rule, after hearing evidence supplementary to what was heard before, the order now complained of was made.
Instead of applying the provision of the Business Corporation Law of May 5, 1933, P. L. 364, 15 PS section 2852-1 et seq.,
2
the learned court below conducted an in
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quiry into the deadlock resulting from the equal division of the two interests. Each interest had three directors. The learned court held that two of the directors representing the Sweet interest were disqualified from voting “on the ground that they were pecuniarily and otherwise interested in Sweet’s Laboratories, Inc.” The learned court does not explain what is meant by the words “otherwise interested in Sweet’s Laboratories, Inc.,” and I have no means of ascertaining it from the record. They were pecuniarily interested but it was precisely that pecuniary interest of each half ownership, which, in the beginning, led to Sweet’s becoming a half owner and the plaintiff becoming the other half owner of Gum, Incorporated, as has been stated. Such pecuniary interest cannot rightfully be regarded as disqualifying one of the half interests from voting, and allowing the other half interest to take the sole control. The Sweet directors were no more interested in the success of Gum, Incorporated, than the plaintiff’s directors. That they were also interested in Sweet could not be disqualifying because from the inception of their relations the intention was that they should act in both capacities. Each had precisely the same character of interest in the success of the corporation. The unfortunate thing was that parties who had set up a business with equal interests should have allowed their differences to reach a stage where they could not agree. There was no fraud in what the directors did at the board meeting; it was always possible by their organization to have a deadlock; but that was not fraud. The record does not present a case calling for the aid of equity to prevent a majority from wrongfully imposing on a minority.
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I do not understand that the cases cited in the opinion just adopted decide that the court -will interfere with corporate management in the circumstances shown; the rule is now being extended to include a class of cases not before within its purview; in
Whyte v. Faust,
281 Pa. 444 , 127 A. 234 , the decision was that equity would not remove an officer of the corporation;
McDougall v. Huntingdon & Broad Top Mountain R. R. & C. Co.,
294 Pa. 108 , 143 A. 574 , was really the case of an insolvent corporation, as page 114 shows, in which a different rule applies; in
Schmid v. Lancaster Avenue Theatre Co.,
244 Pa. 373 , 91 A. 363 , this court held the challenged action of the majority “was in itself a fraud upon the minority rights.”
I think the action of the court below was wrong and that the decree, based on that erroneous conclusion, should be reversed; that the record should be remitted with directions to proceed in accordance with the Business Corporation Law unless some other reason than any that has appeared is shown against it.
Mr. Justice Schaefer and Mr. Justice Drew concur in this opinion.
1
“WHEREAS, the price of base sold by Sweet’s Laboratories, Inc., to Gum, Inc., is 31 cents a pound; and
“WHEREAS, base can be purchased from the Dreyfuss Company for less than 20 cents a pound; and
“WHEREAS, J. Warren Bowman has tested and experimented with the Dreyfuss Company base and has found that the said base is of better quality than the Sweet’s Laboratories,- Inc. base, and
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that the gum made from the Dreyfuss base is a better gum thau that made from the Sweet’s Laboratories, Inc. base;
“NOW, THEREFORE, BE IT RESOLVED AS FOLLOWS:
“RESOLVED that the officers of this company be and they are hereby directed to make no more purchases of base from Sweet’s Laboratories, Inc. until and unless Sweet’s Laboratories, Inc. reduces the price of its base to 20 cents a pound. Provided further that the quality of the base so sold for 20 cents a pound shall be equal to, or better than, the base heretofore sold for 34 cents a pound. And provided further that if Sweet’s Laboratories, Inc. shall not forthwith so reduce its price to 20 cents a pound for such quality of base, the company shall purchase its base from the Dreyfuss Company; and the officers of the company be and they are hereby directed to thereafter purchase all base from the Dreyfuss Company.”
2
Section 1107, 15 PS section 2852-1107, provides: “Involuntary Proceedings for Winding Up and Dissolution. — A. The several courts of common pleas of the Commonwealth may, upon petition filed by a shareholder of a business corporation, entertain proceedings for the involuntary winding up and dissolution of the cor
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poration, when it is made to appear: . . . (4) That the directors are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock, and that irreparable injury to the corporation is being suffered or is threatened by reason thereof.”