Opinion — Del. & Hud. Co. v. Albany & Susquehanna Railroad Co.

DELAWARE AND HUDSON COMPANY ». ALBANY

AND SUSQUEHANNA RAILROAD COMPANY.

CERTIFICATE FROM THE CIRCUIT COURT OF APPEALS FOR THE

SECOND CIRCUIT.

No. 416. Argued February 23, 24, 1909.—Decided May 3, 1909.

Equity rule No. 94, which is intended to secure the Federal courts from

imposition upon their jurisdiction, recognizes the right of the corpo-

rate directory to corporate control, and expresses primarily the con-

ditions which must precede the right of the stockholders to protect

the corporation in cases where the directory is derelict; but the re-

quirements of the rule may be dispensed with where they do not apply

by reason of antagonism between the directory and the corporate

interest.

Equity rule No. 94 is intended to have a practical application and it does

not apply where the corporate interests can only be protected by a

suit, which, if successful, would be detrimental to all the directors in

other capacities.

Where, as in this case, stockholders of a lessor corporation sued, for its

benefit, the lessee corporation, the directors of the two corporations

being almost identical and the lessee corporation also owning, or

436 OCTOBER TERM, 1908.

Argument for the Delaware & Hudson Company. 213 U.S.

holding the voting power, of sufficient stock of the lessee corporation

to control a stockholders’ meeting, the fact that the stockholders

bringing the suit made no demand for relief upon the board of directors

nor any effort to obtain relief at a stockholders’ meeting does not pre-

vent them from maintaining the bill.

Quere, and not decided, whether stockholders have power to compel

directors to institute suits to which the latter are opposed.

Tue facts, and the questions certified, are stated in the

opinion.

Mr. James M. Beck, with whom Mr. Alfred Opdyke was on

the brief, for the Delaware & Hudson Company:

Before a shareholder “is permitted in his own name to insti-

tute and conduct a litigation which usually belongs to the

corporation, he should show to the satisfaction of the court

that he has exhausted all the means within his reach to obtain

within the corporation itself the redress of his grievances or ac-

tion in conformity to his wishes. He must make an earnest,

not a simulated, effort with the managing body of the corpo-

ration to induce remedial action on their part, and this must

be made apparent to the court.” Hawes v. Oakland, 104 U.S.

450; Foss v. Harbottle, 2 Hare, 461; Macdougall v. Gardiner, 1

Chancery Div. 13.

The stockholder of a corporation cannot on his individual

responsibility commence an action for the benefit of the corpo-

ration against another corporation, without first applying to

the managing body of his corporation to do so, and the fact

that a majority of such managing body are also officers, di-

rectors, or employés of the corporation against which the suit

is sought to be brought will not, in the absence of fraud, excusc

the failure of the stockholder to make such application.

The only question which seems open to discussion is whether

the mere fact that a majority of such board were also “ officers,

directors or employés”’ of the company sought to be sued, and

that some of them had only a nominal stock interest in the

Susquehanna Company, in itself and in the absence of any

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 437

213 U.S. Argument for Delaware & Hudson Company.

circumstances of fraud, so conclusively demonstrates the futil-

ity of such application as to excuse it. This conclusion could

be justified only on the assumption that there is a conclusive

presumption of law that the directors of a corporation will

not institute a suit against another corporation, with which a

majority are identified either as “officers, directors or em-

ployés.”’

The vice of the appellees’ position is that they gratuitously

assume that the directors of the Susquehanna Company, men

of recognized standing and probity in the business world,

would have been faithless to the trust reposed in them, and

this solely for the reason that a majority were, as officers, di-

rectors or employés, also identified with the Delaware Com-

pany.

Certainly the presumption that directors will fully discharge

their duties to all the stockholders should not be overborne

at least until they have first refused, upon demand, to bring

suit under conditions that will fully safeguard the interests

of the stockholders, and until such demand and refusal the

ordinary presumption of fidelity to a trust, as anounced by

this court, still remains. Hawes v. Oakland, 104 U. S. 450;

Detroit v. Dean, 106 U.S. 537; Dimpfell v. Ohio Ry. Co., 110

U. S. 209; Quincy v. Steel, 120 U. S. 241; Taylor v. Holmes,

127 U.S. 489.

This rule is laid down in Corbus v. Alaska Co., 187 U. S. 455,

and also in Dodge v. Woolsey, 18 How. 331; Greenwood v.

Freight Co., 105 U. 8. 13; Pollock v. Farmers’ Loan & Trust

Co., 157 U.S.429. Doctor v. Harrington, 196 U. 8. 579, relied

upon by appellees, was exceptional and bears no resemblance

to this case. And Chicago v. Mills, 204 U.S. 321, and Ex parte

Young, 209 U. S. 123, 143, can also be distinguished.

Rule 94 itself assumes that the directors are presumed to

act honestly and according to their best judgment for the in-

terests of all, and this presumption cannot be overborne by

the mere assertion of futility or by the pleader’s license in the

use of adjectives or adverbs. The fraud charged and proven

once er esa ae

ORAM IE SEO SRR tas ipa etes tra Poelg poo

438 OCTOBER TERM, 1908.

Argument for Albany & Susquehanna R. R. Co. 213 U.S.

must be actual and not constructive. ‘“Epithets do not make

out fraud.” Kent v. Canal Co., 144 U.S. 91; Fogg v. Blair, 139

U. S. 127.

In the following cases in state courts the bill was held not to

be maintainable. Wolf v. R. R. Co., 195 Pa. St. 91, 95; Sieg-

man v. Maloney, 65 N. J. Eq. 372; Brewer v. Boston Theatre, 104

Massachusetts, 378; Dunphy v. Traveller Assn., 146 Massachu-

setts, 495; O’Connor v. Virginia, 184 N. Y. 46, 53.

If the complainants were excused under the facts certified

from making any preliminary demand upon the directors, they

nevertheless must show, in order to maintain their suit, that

they could not have secured corporate action by an appeal to

the stockholders of the Susquehanna Company. Hawes v.

Oakland, 104 U.S. 450; Foss v. Harbottle, 2 Hare, 461; Hunting-

don v. Palmer, 104 U.S. 482; Quincy v. Steel, 120 U.S. 241;

Chicago v. Mills, 204 U. S. 321: Doctor v. Harrington, 196

U.S. 579.

Mr. E. Parmalee Prentice, with whom Mr. George Welwood

Murray and Mr. Charles P. Howland were on the brief, for The

Albany and Susquehanna Railroad Company et al:

Complainants are entitled under the facts stated by the

Circuit Court of Appeals to sue as stockholders in the Susque-

hanna Company asserting rights due that corporation. They

were not required before instituting this suit to demand relief

from the directors of the Susquehanna Company. The present

case is not within the purpose of Equity Rule 94 which is to

prevent the maintenance of suits in Federal courts by collusion

between complainants and the defendant corporation whose

rights they assert. Hawes v. Oakland, 104 U.S. 450; Citizens’

Trust Co. v. Illinois Central R. Co., 205 U. 8. 46, 47; Doctor v.

Harrington, 196 U.S. 579, 588; Chicago v. Mills, 204 U.S. 321;

Young v. Mining Co., 71 Fed. Rep. 810; Eldred v. American

&c. Co., 99 Fed. Rep. 168.

The certificate shows that this suit is not collusive.

The present case is not within the requirements of Equity

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 439

213 U.S. Argument for Albany & Susquehanna R. R. Co.

Rule 94, as to demand upon directors. The bill shows under

oath that directors were hostile, that demand upon them would

be idle and nugatory.

Equity will not permit double directors, by contracts made

with themselves in other capacities, to bind shareholders or

the corporation. Wardell v. Railroad Co., 103 U.S. 651; Twin-

Lick Oil Co. v. Marbury, 91 U.S. 587.

A court will not entertain litigation in which both sides are

controlled by one dominus litis. South Spring Gold Co. v.

Amador Gold Co., 145 U.S. 300; Mills v. Green, 159 U.S. 651,

654; East Tennessee &c. Co. v. Telegraph Co., 125 U.S. 695;

Hatfield v. King, 184 U.S. 162. In fact parties who bring such

litigation without disclosing the relationship of parties are

guilty of punishable contempt of court. Lord v. Veazie, 8 How.

251; Little v. Bowers, 134 U. 8. 547, 557; Hatfield v. King, 184

U. S. 162.

When directors are under adverse control stockholders may

sue without demand for relief from a hostile board. Citizens’

Trust Co. v. Illinois Central Railroad, 205 U. 8. 46; Doctor v.

Harrington, 196 U.S. 579; Corbus v. Gold Mining Co., 187 U.S.

455; Heath v. Erie Railway Co., 8 Blatch. 347, 409; Bill

v. Telegraph Co., 16 Fed. Rep. 14, 19; Columbia Dredging Co. v.

Washed Bar Sand Dredging Co., 136 Fed. Rep. 710; Bigelow v.

Calumet & Hecla Mining Co., 155 Fed. Rep. 869; Dickinson

v. Traction Co., 114 Fed. Rep. 232; Eldred v. American &c.

Co., 99 Fed. Rep. 168; Berwind v. Canadian Pac. Ry. Co., 98

Fed. Rep. 158; Ball v. Rutland R. Co., 93 Fed. Rep. 513; Weir

v. Bay State Gas Co., 91 Fed. Rep. 940; Rogers v. Nashville &c.

Ry. Co., 91 Fed. Rep. 299; De Neufville v. Railroad Co., 81 Fed.

Rep. 10.

Complainants were not required before instituting this suit

to demand relief at a meeting of Susquehanna stockholders.

See Brewer v. Boston Theatre, 104 Massachusetts, 378, 387.

Demand on stockholders was not necessary in this case be-

cause under the Susquehanna charter stockholders could not

grant relief. Laws, New York, 1850, Ch. 140.

440 OCTOBER TERM, 1908.

Argument for Albany & Susquehanna R. R. Co. 213 U.S.

In all litigation involving the action of the corporation they

(the directors) are its representatives in court. Stockholders

cannot control or interfere with their management. Railway

Co. v. Alling, 99 U.S. 463, 472; Pullman Co. v. Missouri Pacific

R. Co., 115 U. S. 587; Beveridge v. New York &c. R. Co., 112

N. Y. 1, 21, 23; Robinson v. Smith, 3 Paige, Ch. 222; McCul-

lough v. Moss, 5 Denio, 567; Conro v. Port Henry Iron Co., 12

Barb. 27; Morawetz on Corps., 2d ed., §§ 283, 510; Cook on

Corps., 5th ed., §§ 684, 750.

Even if stockholders could by resolution require directors to

institute litigation against the Delaware Company, they could

not oust directors from office, before expiration of their terms.

Laws, New York, Act of 1850, ch. 140, § 5.

No court would entertain a suit against the Delaware Com-

pany conducted by the Delaware administration of the Susque-

hanna Company. South Spring Gold Co. v. Amador Gold Co.,

145 U. 8. 300; Mills v. Green, 159 U. S. 651; East Tennessee

&c. Co. v. Telegraph Co., 125 U. 8. 695.

Suits are regularly maintained in Federal courts without

demand upon stockholders for a resolution directing litigation.

Ex parte Young, 209 U.S. 123; Cotting v. Kansas City Stock

Yards Co., 183 U.S. 79; Dinsmore v. Southern Express Co., 183

U.S. 115; Smyth v. Ames, 169 U. S. 466; Pollock v. Farmers’

&ce. Trust Co., 157 U.S. 429; Greenwood v. Freight Co., 105 U.S.

13; Schultz v. Highland Gold Mines Co., 158 Fed. Rep. 337;

Perkins v. Northern Pacific Co., 155 Fed. Rep. 445; Monmouth

Investing Co. v. Means, 151 Fed. Rep. 159; Weir v. Bay State

Gas Co., 91 Fed. Rep. 940; Ball v. Rutland Railroad Co., 93

Fed. Rep. 513; Dinsmore v. Southern Express Co., 92 Fed. Rep.

714.

No case was ever dismissed from a Federal court for want of

an application to stockholders for a resolution directing liti-

gation on behalf of the corporation.

There was nothing to submit to stockholders.

When a stockholders’ vote makes a voidable act valid or

void, it acts upon something which directors have done. In

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 441

213 U.S. Argument for Albany & Susquehanna R. R. Co.

this case directors have done nothing and stockholders cannot

control their course.

Stockholders cannot, by anything short of a unanimous vote,

authorize or ratify gifts of corporate property. Brewer v. Bos-

ion Theatre, 104 Massachusetts, 378; Jackson v. Ludeling, 21

Wall. 616; Ervin v. Oregon R. & N.Co., 27 Fed. Rep. 625,

631; Mumford v. Ecuador Development Co., 111 Fed. Rep. 639;

Menier v. Telegraph Works, L. R. 9 Ch. App. 350; Gamble v.

Queens County Water Co., 123 N. Y. 91; Farmers’ &c. Trust Co.

v. New York &c. R. Co., 150 N. Y. 410.

Complainants desiring institution of a law-suit were not re-

quired by Rule 94 to ask for election of a new board of directors.

When this suit was instituted the Delaware Company con-

trolled the Susquehanna stock vote.

Stockholders whose corporation is in adverse control are

entitled to protection by injunction.

Complainants are entitled to maintain this bill by reason of

their direct relations to both defendant corporations. Rule 94

does not apply to this case.

The Delaware Company has not only agreed with the lessor

corporation by covenant in the lease to pay rent for the Susque-

hanna property, but by the guarantee on stock certificates has

also agreed with individual stockholders that payment of this

rent shall be made by dividing the corporate income as pro-

vided in the lease.

The Delaware Company has, therefore, in respect to corpo-

rate rights of the Susquehanna Company, entered into privity

of contract with every. Susquehanna stockholder, concerning

division of the entire rent. Hawes v. Oakland, 104 U.S. 450.

Stockholders’ suits cannot be at law, for the guarantees are

part of the entire covenant to pay the entire rent arising from a

single demise of corporate property.

An action to divide corporate income among stockholders

must be brought in equity,—otherwise the lessee’s right of off-

set would be defeated and unequal division of income made

among stockholders. Barr v. New York &c. Co., 96 N. Y. 444.

442 OCTOBER TERM, 1908.

Opinion of the Court. 213 U.S.

Mr. Justice McKenna delivered the opinion of the court.

The certificate of the court is as follows:

“This cause comes here upon appeal from a final decree of the

Circuit Court, Southern District of New York, which directs

that the defendant Delaware and Hudson Company (herein-

after called the Delaware Company) pay to the defendant the

Albany and Susquehanna Railroad Company (hereinafter called

the Susquehanna Company) the amount of $1,107,923.24.

“The case was fully argued and submitted on briefs. It

thereupon developed that there was a question presented

whether the bill could be maintained under the ninety-fourth

equity rule. That question is a preliminary one, it has been

held to be jurisdictional in character (City of Chicago v. Mills,

204 U. 8. 321; Doctor v. Harrington, 196 U. 8. 579), and this

court desires the instruction of the Supreme Court for its proper

decision.

Statement of Facts.

“The facts upon whith the question arises are as follows:

“The defendant corporations are both citizens of the State

of New York; the complainants are citizens of the States of

Connecticut and Rhode Island. The bill was brought to ob-

tain an accounting for various sums of money which it was al-

leged became due at intervals during a series of years from the

Delaware Company to the Susquehanna Company as rental or

in the nature of rental under a lease made in 1870. For the

convenience of all a copy of the pleadings is hereto annexed,

marked Exhibit ‘A,’ which may be referred to for a more de-

tailed statement of the cause of action. The bill does not ‘set

forth with particularity the efforts of the plaintiffs to secure

such action as they desire on the part of the managing direc-

tors or trustees.’ Nor did the proofs show any such efforts.

Nor does the bill set forth any efforts to secure ‘such action on

the part of the shareholders.’ Nor did the proofs show any

such efforts. Nor did the bill set forth, or the proofs show, ‘the

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 443

213 U.S. Opinion of the Court.

causes of their failure to obtain such action’ otherwise than is

hereinafter disclosed.

“The complaint was filed on June 12, 1906. The Susque-

hanna Company was organized under the act of April 2, 1850,

which provides that ‘there shall be a board of thirteen direc-

tors . . . to manage its affairs,’ and for many years be-

fore this suit was brought a majority of the board of directors

of the Susquehanna Company consisted of persons who were

officers, directors or employés of the Delaware Company. At

the time this suit was instituted, the directors and officers of

the Susquehanna Company, the dates of their election as such,

and their relations to the Delaware Company with dates of

election were as shown on the following statement:

Names of directors of Susquehanna a >

Company and dates of election as Position in Delaware and Hudson

directors and officers. Company and dates.

Robert M. Olyphant, 1878 Director since 1872

President from 1884 to 1903

Chairman of the Board since

1903

George I. Wilber, 1883 Director since 1901

David Wilcox, 1894 (Vice Pres- General counsel 1894 to 1903

ident, May 9, 1906) Director since 1899

President since 1903

R. Suydam Grant, 1901 Director since 1886

Charles A. Peabody, 1902 Director since 1902

William S. Opdyke, 1903 General counsel since 1903

Director since 1905

Abel I. Culver, 1903 A Vice President since 1903

Charles A. Walker, 1892 Treasurer 1892

Robert Olyphant, 1887 (Presi- Son of Robert M. Olyphant

dent since 1889)

William L. M. Phelps, 1873 Secretary of the Albany and

(Secretary since 1870) Susquehanna Company,

elected by the board of di-

rectors.

Robert C. Pruyn, 1890 Nominees of the Delaware Com-

pany as stated in the Dela-

James H. Manning, 1890 ware Company’s answer.

444 OCTOBER TERM, 1908.

Opinion of the Court. 213 U.S.

“Of these, Robert M. Olyphant, R. Suydam Grant, Charles

A. Peabody, William S. Opdyke, Abel I. Culver and Robert C.

Pruyn at the time this suit was begun did not own or hold in

their own right any shares of stock in the Susquehanna Com-

pany, but shares of stock of that company owned by the Dela-

ware Company were transferred to each of them on the books of

the Susquehanna Company by the Delaware Company for the

purpose of qualifying them as such directors. Charles A.

Walker owned five shares of Susquehanna stock from 1901 to

1906; it does not appear that he owned any stock in the Susque-

hanna Company during the year 1906.

“So far as appears from anything shown in this record none

of the directors or officers of the Delaware Company ever, be-

fore or after the bringing of this suit, treated the claim therein

set forth otherwise than as one of doubtful validity the pay-

ment of which was to be resisted.

“On June 12, 1906, and for thirty years prior thereto, the

capital stock of the Susquehanna Company had been fixed at

and limited to 35,000 shares. Of this capital stock on June 12th,

1906, the Delaware Company owned 4500 shares and its direc-

tors or officers owned or controlled 4340 shares; the com-

plainants owned 1312 shares and a so-called Protective Com-

mittee who from and after December, 1905, had been opposing

the administration of the Delaware Company upon the ques-

tions involved in this bill controlled 6688 shares. The entire

35,000 shares were held by 546 different persons, of whom 423

owned 50 shares or less, and of whom 383 resided in the State

of New York.

“An annual meeting of the Susquehanna Company was held

subsequent to the beginning of this suit, on October 16, 1906.

At that meeting the nominees of the protective committee were

elected, receiving 15,501 ballots, the nominees of the former

management receiving 15,441 ballots. About two weeks before

such annual meeting the Susquehanna Company being then

controlled by the directorate above named, filed a demurrer to

the bill which is hereto annexed as Exhibit ‘B.’ Copies of

REITING ND: SSR

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 445

213 U.S. Opinion of the Court.

such demurrer were sent by stockholders opposed to the existing

control to all stockholders and thereafter and before the meet-

ing proxies for several thousand shares were received by the

persons who voted for the nominees then elected.

Questions Certified.

‘Upon the facts above set forth the questions of law concern-

ing which this court desires the instruction of the Supreme

Court are:

“First. ‘Does the fact that before institution of this suit

complainants made no demand for relief upon the Board of

Directors of the Susquehanna Company prevent them from

maintaining this bill?’

“Second. ‘Does the fact that before institution of this suit

complainants made no effort to obtain relief at a stockholders’

meeting prevent them from maintaining this bill?’”’

The questions in connection with the ninety-fourth equity

rule present the issue in the case. The rule is as follows:

“94, Every bill brought by one or more stockholders in a

corporation against the corporation and other parties founded

upon the rights which may properly be asserted by the corpo-

ration must be verified by oath, and must contain an allegation

that the complainant was a shareholder at the time of the

transaction of which he complains, or that his share had de-

volved upon him since by operation of law, and that the suit is

not a collusive one to confer on a court of the United States

jurisdiction of a case of which it would not have otherwise

cognizance. It must also set forth with particularity the efforts of

the plaintiff to secure such action as he desires on the part of the

managing directors or trustees, and, if necessary, of the share-

holders, and the causes of his failure to obtain such action.”

Do the facts show a compliance with the rule, or rather that

part of it which we have expressed in italics? The other parts

of it are not involved.

It is the contention of appellant that the averments in the

bill as exhibited in the certificate do not satisfy either the

446 OCTOBER TERM, 1908.

Opinion of the Court. 213 U.S.

language of the rule or its substance. The argument is that

(1) a shareholder, as a condition of his suit, must show that he

has exhausted all the means within his reach to obtain within

the corporation itself the redress of his grievances, that his

efforts must be earnest, not simulated, and this must be made

apparent to the court; (2) his failure to apply to the managing

body of the corporation will not, in the absence of fraud, be

excused by the fact that such managing body are also officers,

directors or employés of the corporation against which the

suit is brought; (3) if the facts of this case excused from a

preliminary demand upon the directors, the complainants

were required to show “that they could not have secured

appropriate action by an appeal to the stockholders of the

Susquehanna Company.”’ The appellees counter these con-

tentions by asserting that (1) the case is not within the require-

ments of Rule 94. “The bill shows, under oath,” it is said,

“that the directors were hostile, and that demands upon them

would be ‘idle and nugatory.’ .’ (2) Complainants

(appellees here) were not required to appeal to the stockholders

of the Susquehanna Company because (a) the stockholders,

under the charter of the company, could not grant relief;

(b) even if such power existed, the stockholders “could not

oust directors from office before expiration of their terms.”

And it is further contended that at the time the suit was in-

stituted “the Delaware Company controlled the stock vote of

the Susquehanna Company.”

These opposing contentions present a not unusual case where

the rule or principle of law is clear enough, but its application to

a particular case is not so clear, and there is a contest of plausi-

ble constructions between which it is not always easy to decide.

The purpose of Rule No. 94 hardly needs explanation. It is

intended to secure the Federal courts from imposition upon

their jurisdiction and recognizes the right of the corporate

directory to corporate control; in other words, to make the

corporation paramount, even when its rights are to be pro-

tected or sought through litigation. Cases in this court have

earners snerseecnnes erence

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 447

213 U.S. Opinion of the Court.

indicated such right. But the directory may be derelict and the

interests of stockholders put in peril, and a case hence arises in

which the right of protecting the corporation accrues to them.

Rule 94 expresses primarily the conditions which must precede

the <ercise of such right, but emergencies may arise in which

the antagonism between the directory and the corporate in-

terest may be unmistakable, and the requirements of the rule

may be dispensed with, or, it is more accurate to say, do not

apply. There are cases which illustrate these contingencies.

As a typical case of the first kind, that is, which enforces the

doctrine that the rights of the corporation must be asserted

through the corporation, Hawes v. Oakland, 104 U. 8. 450, is

cited. In that case Dodge v. Woolsey, 18 How. 331, was de-

clared to be the leading case on the subject in this country, and,

examining the latter case, it wes said that it did not establish,

nor was it intended to establish, a doctrine different in any

material respect from that found in the other American cases

and the English cases. And the doctrine was said to be that

to enable a stockholder in a corporation to sustein in a court of

equity a suit founded on a right of action existing in the corpo-

ration itself, and in which the corporation itself is the appro-

priate plaintiff, there must exist as a foundation for the suit

some action or threatened action of the managing board of di-

rectors which is beyond their authority; a fraudulent transac-

tion completed or contemplated which will result in serious

injury to the corporation or stockholders; where the board of

directors, or a majority of them, are acting for their own in-

terest in a manner destructive of the corporation itself or of the

rights of other stockholders; or where a majority of the stock-

holders themselves are oppressively and illegally pursuing a

course inimical to the corporation or to the rights of the other

stockholders. The court expressed the possibility that other

cases might arise, but said “the foregoing may be regarded as

an outline of the principles which govern this class of cases.’’

Determined by the principles enumerated, the court affirmed

a decree sustaining a demurrer to a bill by a stockholder of the

448 OCTOBER TERM, 1908.

Opinion of the Court. 213 U.S.

Contra Costa Waterworks Company, filed in behalf of himself

and other stockholders against the company, its directors and

the city of Oakland, to enjoin the city from taking, ard the

directors from permitting it to take, water from the works of

the compat.y without compensation. The bill alleged a request

of the directors to take proceedings, and that they declined to

do so. The bill also alleged injury to the corporation, diminu-

tion of dividends of the complainant and other stockholders,

and a decrease of the value of their stock. Appellant adduces,

as repeating and illustrating the doctrine of Hawes v. Oakland,

the following cases: Dimpfell v. Ohio & Mississippi Ry. Co.,

110 U. 8. 209; Quincy v. Steel, 120 U. 8. 241; Taylor v. Holmes,

127 U. 8. 489; Corbus v. Alaska Treadwell Gold Mining Co., 187

U. 8. 455. The latter case is quoted by appellant as putting

unmistakable emphasis on Rule 94, and that the facts of the

case at bar do not satisfy its requirements. The object of the

suit was to enjoin the board of directors of the corporation from

paying a license tax levied upon the corporation under the pro-

visions of an act of Congress. Corbus, the complainant in the

suit, was a stockholder of the corporation, and alleged, as the

reason of the suit by him, that he was unable to request the

directors of the company to refuse to pay the tax or apply for

the license required by reason of their great distance from him,

but that he had made such request of the officers of the com-

pany residing in Alaska, and that they had refused to comply

with the request. Of this allegation the court said that it

showed no compliance with Rule 94, and that complainant

simply relied on the distance of the directors from where he

resided as an excuse for not applying to them. “We are of

opinion,” it was said, “that the excuse is not sufficient. He

should at least have shown some effort. If he had made an

effort and obtained no satisfactory result, either by reason of

the distance of the directors or by their dilatoriness or unwill-

ingness to act, a different case would have been presented, but

to do nothing is not sufficient. ’

A case sustaining the second proposition which we have

—

DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 449

213 U.S. Opinion of the Court.

mentioned, to wit, where the circumstances take the cases out

of the rule, is Doctor v. Harrington, 196 U.8. 579. The suit was

brought by Doctor and others as stockholders of a corporation

called the Sal Sayles Company to set aside a judgment obtained

by the Harringtons against that company. The bill alleged

that the suit was not collusive ; that complainants were unable

to obtain redress from the company or “at the hands”’ of its

stockholders. It further alleged that the board of directors of

the corporation was “ynder the absolute conyrol and domina-

tion of the defendant, John J. Harrington, and that said Har-

rington, by reason of having the possession of a majority of the

capital stock of said corporation,” likewise controlled “the

action of the stockholders.” It was further alleged that he

refused to give any information with regard thereto, and de-

clined to redress the wrongs of which complaint was made, or

_give complainants any opportunity to lay before the board of

directors or the stockholders of the company the facts set forth.

It will be observed, therefore, that there was no compliance

with the requirements of Rule 94, as expressed in its letter. The

efforts that were made to secure the action of the managing

directors or trustees were not “set forth with particularity.”

Nothing was alleged but the domination of John J. Harrington

and his control of the directors. What he did, in what way he

exerted control, was not alleged. In other words, the bill

seemed to show a case not of compliance with the requirements

of Rule 94, but circumstances which excused from such com-

pliance.

Coming to consider the effect of those allegations, we said

that Rule 94 contemplates that there may be, and provides for,

a suit by the stockholder in a corporation founded on rights

which may be properly asserted by the corporation. And we

further said that “the ultimate interest of the corporation made

defendant may be the same as that of the stockholder made

plaintiff, but the corporation may be under x control antago-

nistic to him and made to act in any way detrimental to his

interest. In other words, his interests and the interests of the

VOL, ccxut—29

450 OCTOBER TERM, 1908.

Opinion of the Court. 213 U.S.

corporation may be subservient to some illegal purpose.” And

we decided that these principles were satisfied by the allegations

of the bill and that such antagonism existed between the com-

plainants in the suit and the directors of the corporation that

they would “suffer irremediable loss if not permitted to sue.”

In other words, the complainants were in such a situation by

reason of the power which Harrington possessed over those who

managed the corporation—directors and stockholders—that

appeals to them for action would have been futile. Prior cases

were considered, including Dodge v. Woolsey and Hawes v. Oak-

land, and the conclusion reached was pronounced to be in ac-

cordance with their doctrine.

Do the facts in the case at bar present the same situation

that was passed on in Doctor v. Harrington? The certificate

shows the following facts: The complaint was filed June 12,

1906. The sui. was brought to obtain an accounting for various

sums of money, which it was alleged became due at intervals

during a series of years from the Delaware Company to the

Susquehanna Company as rental, or in the nature of rental,

unde? a lease made in 1870. The Susquehanna Company was

organized in 1850, and, under the law, its board of directors

consisted of thirteen members, a majority of whom for many

years before this suit was brought were also “officers, directors

or employés of the Delaware Company.” Indeed, they served

as its president, vice president, treasurer, secretary, directors

and general counsel—officers of dominating influence, it must

be said. It appears that certain of the persons occupying those

offices did not at the time the suit was brought own or hold in

their own right any shares of stock in the Susquehanna Com-

pany, but shares of stock in that company owned by the Dela-

ware Company were transferred to each of them on the books

of the former company by the latter company for the purpose

of qualifying them as directors. The number of shares of the

capital stock of the Susquehanna Company and how held or

owned, and the attitude of the owners thereof to the Delaware

Company, appear in the certificate and need not be repeated.

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DEL. & HUD. CO. v. ALBANY & SUSQUEHANNA. 451

213 U.S. Opinion of the Court.

The certificate recites the following: “So far as appears from

anything shown in the record none of the directors or officers

of the Delaware Company ever before or after the bringing of

this suit treated the claim therein set forth otherwise than as

one of doubtful validity, the payment of which was to be re-

sisted.”

The situation was unique. The company whose interest it

was to assert the right to payment and to demand it was under

the control or could be influenced by the company whose inter-

est it was to deny indebtedness and resist payment. And

though there are allegations in the bill of contrary import, the

good faith of the directors need not he questioned. They might

notwithstanding be firm in their views—firm to resist appeals

against them. Their views scemed to persist through many

years. At any rate, a situation was presented fully as formida-

ble to the interest of stockholders in the Susquehanna Company

as that presented in the Harrington case. And it may be well

doubted whether, if the directors of the Susquehanna Company,

so being directors 0. the Delaware Company, and who either

from an apathy that endured through many years could dis-

cern no right in that company to assert or through conviction

of the absence of right, were not the best agents to begin or

conduct a litigation of such right. It was certainly natural

enough that a stockholder should seek more earnest represent-

atives and consider that the directors “occupied,” to use the

language of Dodge v. Woolsey, “antagonistic grounds in respect

to the coutroversy”’ as to him. The attitude of the directors

need not be sinister. It may be sincere. It was so in Chicago

v. Mills, 204 U. 8. 321, and Fx parte Young, 209 U.S. 123, and

other cases. In this case it was certainly determined. It con-

tinued until after this suit was brought. Both the Delaware

Company and the Susquehanna Company, then under “the

administration of the Delaware Company,” to quote from the

Circuit Court of Appeals, demurred to the bill.

But it is contended that efforts should have been made and

alleged to move the corporation to action through a stock-

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DRI ae ti Eat ABE re Dm

452 OCTOBER TERM, 1908.

Opinion of the Court. 213 U.S.

holders’ meeting. In this conteation there is again similarity

to the Harrington case. It was there alleged that Harrington

controlled the action of the stockholders “by reason of having

possession of a majority’’ of the capital stock of the corpora-

tion. The control in the case at bar, therefore, may not have

been as direct as in Doctor v. Harrington, but it was practically

efficient. The stock of the Susquehanna Company consisted

of 35,000 shares, of which the Delaware Company and its di-

rectors and officers held 8,840. The complainant and a so-

called protective committce, a committee which the certificate

states “from and after December, 1905, had been opposing the

administration of the Delaware Company upon the questions

involved in this bill,’ controlled 8,000 shares. The certificate

also states that the “entire 35,000 shares were held by 546

different persons, of whom 423 owned 50 shares or less, and of

whom 383 resided in New York.”’ The proposition then is, that

notwithstanding the power of 8,840 shares, held by the man-

agers of both corporations, against 8,000 held by complainants

and the protective committee, complainants were required by

Rule 94 to engage and organize all other stockholders, or

enough of them to direct or change the corporate management ;

in other words, struggle for the control of the corporation with

an adverse board of directors. And such struggle, appellant

contends, “could not be regarded as presumptively futile,” as

there would be an appeal to “the self-interest of the remaining

stockholders,” and, it is pointed out, that the certificate recites

that control through the stockholders was subsequently ob-

tained. But it was obtained after the suit was begun and the

antagonism of the directors was more clearly exhibited. The

circumstances of this case preclude therefore an acceptance

of appellant’s proposition. Rule 94 is intended to have prac-

tical operation, and to have that it must, as to its requirements,

be given such play as to fit the conditions of different cases.

Therefore, considering that this case by reason of its facts falls

within the principle of Doctor v. Harrington, we do not review

the cases cited by appellee, wherein, it is contended, suits were

MANSON v. WILLIAMS. 453

213 U S. Counsel for Parties.

justified by demand on the directors alone, nor consider whether

stockholders have the power to compel directors to institute

suits to which the directors are opposed.

\ve answer both questions certified in the negative.