AMERICAN LIFE INSURANCE COMPANY v. Powell

On Rehearing

PER CURIAM.

Disregarding the acerbic nature of the rehearing brief of appellees and the appellant’s request that it be stricken for contemptuousness on authority of Birmingham Ry., Light & Power Co. v. Saxon, 179 Ala. 136 , 59 So. 584 , we will respond to such of the argument as is deemed worthy of further comment.

It is still strenuously argued that this court was in error in holding that the com-' plainant should have made an appeal to the stockholders before resorting to equity.

It is asseverated that the majority of the-stockholders could not ratify the alleged misappropriations and, therefore, an appeal to them would have been useless. This is not the law of Alabama and never has been. Counsel cites cases from other jurisdictions, the import of some of which tend in that direction. The rehearing brief of appellees refers to the annotation of Continental Securities Co. v. Belmont, 206 N.Y. 7 , 99 N.E. 138 , 51 L.R.A.,N.S., 112. The annotation discusses at length the doctrine of some other jurisdictions which counsel urges this court to adopt. Generally that doctrine is “(1) Courts will not *568 interfere in the management of a corporation in any case so long as the acts complained of are within the power of the corporation and are the result of the honest judgment of the corporation, acting through its officers. (2) Where the acts complained of are within the power of the corporation, but are so injurious to the corporation, and through it to at least part of the stockholders, that it is apparent that the corporation has not exercised an honest judgment in the matter, then the court will interfere, but only as a last resort; i. e., after both the board of directors and the body of stockholders have been given a chance to rectify the wrongful acts.' (3) Where the corporation has no legal power or authority to commit the acts complained of, then any injured stockholder may sue; but he should obtain permission from the board of directors to use the corporate name, and if refused permission he may proceed without applying to the stockholders.” — 51 L.R.A..N.S., 113.

But on page 118 of the annotation it is pointed out that the rule in Alabama is that as predicate for such a suit, in addition to appealing to the corporate directorate there must also be an appeal to the stockholders, no sufficient excuse for not so doing being shown and this “without regard to the nature of the subject matter of the suit.” Indeed, the following Alabama cases, among many others, clearly show that merely because fraud is charged is not sufficient to take the case out of the general rule: Hagood v. Smith, 162 Ala. 512 , 50 So. 374 ; Howze v. Harrison, 165 Ala. 150 , 51 So. 614, 615 ; Tuscaloosa Mfg. Co. v. Cox, 68 Ala. 71 ; Decatur Mineral & Land Co. v. Palm, 113 Ala. 531 , 21 So. 315 ; Steiner v. Parsons, 103 Ala. 215 , 13 So. 771 ; Louisville & N. R. Co. v. Neal, 128 Ala. 149 , 29 So. 865 ; Montgomery Light Co. v. Lahey, 121 Ala. 131 , 25 So. 1006 .

For a later annotation see 72 A.L.R. 628 , which states the general rule as follows:

“The cases are uniform in holding that there must be a request that the stockholders as a body sue the directors, or that an action be brought for their benefit, before an individual stockholder may bring an action in the interest of the corporation, — unless such a request would be useless and unavailing. In other words, an individual stockholder must exhaust all means of redress within the corporation before bringing-an action in the interest of the corporation.”

But it is argued that the majority stockholders would be powerless to act in any event because (1) § 22, Title 10, Code 1940, as amended by Act 289, General Acts of Alabama 1951, p. 577, which provides that the management of a corporation organized under the article shall be vested in a board of directors except as otherwise provided by law or in the certificate of incorporation; and (2) that the bill showed that the management of the defendant corporation was vested in its board of directors by its charter and by laws. We do not regard the argument as at all persuasive.

Section 22 as last amended was not brought to our attention and not considered on original deliverance, but the averment of the charter provision was before us and was considered. As we see it there would be no difference in this respect between the charter of the corporation in question and the Code provision. Power to manage a corporation being vested by the laws of the state would appear to give no different power of management than that lawfully granted by the corporate charter.

We are directed to many cases from other jurisdictions which do indicate that under such a status (management being vested in the board of directors) an appeal to the stockholders would not be necessary before court action in a case such as is now before the court. A statement of the rules enunciated by such cases may be found in 13 Fletcher, Corporations, § 5964 (1943). But as heretofore mentioned, the law of Alabama has been established otherwise. Indeed, before many of our cases enunciating the principle (that resort must be made to the stockholders) were decided,. § 36 of the Corporation Act of 1903, p. 329, indicated the legislative concept that *569 the management of corporations was usually vested in a board of directors.

To further pursue appellees’ argument, it is that bringing a lawsuit is a function of management and that if the management of a corporation is vested in its board of directors, then the stockholders are powerless to bring or order the bringing of such an action. The argument impresses us as rather sophistical. It may be conceded that power by its very nature is indivisible, that if it resides in one body it does not reside in another. But this reasoning applied to its logical conclusion in the case at hand would not mean that ap-pellees could bring this action without an appeal to the stockholders, but would mean that they could not bring it at all. For if the power to sue on corporate causes of action rests exclusively and irremediably only in the board of directors, no individual stockholder or group of stockholders could institute such an action. We have never heard of a case where the power of management was so vested in the holders of a minority of the stock that the majority in such case could be thus dethroned. Yet the books are replete with cases where such persons have sued on corporate causes of action. This has been in spite of internal corporate regulations and not due to them. It has been by virtue of the broad powers of courts of equity. If equity then permits a suit by a minority of the stockholders in spite of corporate rules, we cannot see the logic of the position that a suit by a majority of the stockholders would be prohibited due to such rules.

All our cases holding that an appeal must be made to the stockholders seemed to have presupposed that the management was vested in a board of directors— that ordinarily being an attribute of the corporate entity. “Ordinarily the directors constitute the governing board of a corporation, and are controlled only by the stockholders * * —Howze v. Harrison, 165 Ala. 150, 156 , 51 So. 614, 616 . In Tuscaloosa Mfg. Co. v. Cox, 68 Ala. 71 , it was stated:

“Private corporations, like partnerships, are formed for private gain. Their conduct and management are usually confided to a governing body, called a board of directors. * * * in the government of corporations, much must be left to the judgment and discretion of the directory, and much must be credited to the fallibility of human judgment. If it be supposed an unwise course is being pursued, or that the interests of the corporation are suffering, or likely to suffer through the inefficiency or faithlessness of an official, an appeal should first be made to the directory or governing body, to redress the grievance. Failing there, in ordinary cases the next redress will be fotmd in the power of the ballot, which usually comes into exercise at short intervals.?’ (Italics supplied.)

In Merchants’ & Planters’ Line v. Waganer, 71 Ala. 581 , it was held that a person should ordinarily address himself to the stockholders before attempting to sue on a corporate cause of action, though the report of the case reveals that it was alleged that the directors were the “active managers of said corporation.” That case also quoted approvingly from Hawes v. City of Oakland, 104 U.S. 450 , 26 L.Ed. 827 , as follows:

“But, in addition to the existence of grievances which call for this kind of relief, it is equally important that before the shareholder is permitted in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all means within his reach, to obtain, within the corporation itself, the redress of his grievances, or action in conformity to his wishes. He must make an earnest, not a simulated effort, with the managing body of the corporation, to induce remedial action on their part, and this must be made apparent to the court. If time permits, or has permitted, he must show, if he fails zvith the directors, that he has made an honest effort to obtain action by the stockholders as a body, in the matter of which he complains; and he must show a case, if this is not done, where it could not be *570 done, or it was not reasonable to require it.” (Italics supplied.)

Thus our cases seem clear to the point that the mere fact that the management of a corporation is entrusted to a board of directors does not excuse an aggrieved stockholder from calling upon the other stockholders before submitting his plight to a court of equity.

We have assiduously studied in consultation and in chambers the application for rehearing, in connection with the proffered briefs, and are still firmly of the opinion that the conclusions attained on original deliverance are sound, and forego further comment.

Application for rehearing overruled.

All the Justices concur except MAY-FIELD, J., not participating, he having taken no part in the original consideration of the case.