Petitioners Brief — May v. Midwest Refining Co.

BRIEF IN SUPPORT OF THE PETITION FOR

CERTIORARI

OPINIONS BELOW

The opinion of the District Court on the special

motion (R. 300) is reported in 25 Fed. Supp., 560. The

opinion in the Circuit Court of Appeals has not been

reported.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on June 6, 1941 (R. 432). The jurisdiction

of this court is invoked under Section 240 (a) of the

Judicial Code as amended by the Act of February 13,

1925, (28 U.S. C. A., Section 240 (a); 43 Stat. 936).

STATEMENT

A concise statement of the proceedings, and of

the questions involved has been made in the foregoing

petition.

SPECIFICATION OF ERRORS

1. The Circuit Court of Appeals erred in af-

firming (R. 482) the final decree of the United States

District Court for the District of Maine (R. 400, 401)

granting the special motion filed by defendants on

January 13, 1938 (R. 290, 293).

9

2. The Circuit Court of Appeals erred in affirm-

ing (R. 432) the final decree of the United States Dis.

trict Court for the District of Maine (R. 400, 401) in-

so-far as the same struck and dismissed prayers (b)

and (c) from the bill of complaint as last amended.

3. The Circuit Court of Appeals erred in affirm-

ing (R. 432) the final decree of the United States Dis-

trict Court for the District of Maine (R. 400, 401) in-

so-far as it decreed that the amended bill of complaint

be dismissed upon the payment into Court by the de-

fendants of the amount the Court determined to be

the plaintiff's share as a stockholder in the full

amounts claimed to be due The Midwest Refining

Company, a corporation, under prayers (d), (e), (f)

and (g) of the amended bill of complaint on account

of the matters and things set forth and alleged in said

amended bill of complaint, with interest, and the pay-

ment into Court with interest of plaintiff's counsel

fees, and expenses.

ARGUMENT

As disclosed by the foregoing petition, a suit by

a minority stockholder against a dominant majority

stockholder, brought in the right of the dominated

corporation, to set aside a sale of all assets of the

dominated corporation to the dominant stockholder

and its controlled subsidiary and for an accounting,

and seeking, in addition, the recovery of a large sum

of money, alleged to be due by the dominant stock-

holder to the dominated corporation, has been termi-

nated without a trial on the merits by striking on mo-

10

tion supported only by ex parte affidavits the prayers

seeking to set aside the sale and for accounting and by

decreeing that the dominant stockholder pay into court

$1,246.22 as plaintiff’s share, as a stockholder, in a re-

covery Of $15,554,681.58 claimed, and for the purposes

of the motion, admitted to be due by said dominant

stockholder to the corporation under the remaining

prayers, together with $40,800.00 as counsel fees and

$2,346.27 as expenses, and that the suit be dismissed

upon the payment of said sums into Court.

Aside from the arbitrary striking from the com-

plaint of prayers (b) and (c), based upon allegations

which admittedly stated a sufficient cause of action

for the equitable relief therein prayed, the procedure

sanctioned by the judgment of the Circuit Court of

Appeals is a manifest departure from established legal

principles and practice in minority stockholder suits.

In their brief in the Court of Appeals the at-

torneys for defendants “concede that the procedure

adopted in this case is novel” and that they “have been

unable to discover any recorded case in which a simi-

lar motion has been passed upon * *.” The District

Court characterizes the procedure as “somewhat un-

usual.” (R. 308). The Circuit Court of Appeals frank-

ly concedes that it is novel and quotes the special mo-

tion in the margin of its opinion “Because of its nov-

elty.” (R. 420). We respectfully submit that it is not

only novel and unusual, but is a radical and dangerous

departure from the established principles of law gov-

erning derivative suits by minority stockholders in

the righi of their corporations. It is radical because

it converts a suit in the right of the corporation to re-

11

So tt eaeapaeaaiaas

cover over fifteen million dollars due to it into a suit

by the minority stockholder to recover in his own right

a part thereof proportionate to his stock ownership,

lt is dangerous because it establishes a precedent by

which a dominant majority stockholder, who has used

his power of domination to the loss and detriment of

the dominated corporation, can escape full responsi-

hility to said corporation and to other stockholders by

dealing only with each stockholder who takes action

in behalf of the corporation. It permits such dominant

stockholder to force the dismissal of every suit brought

by a minority stockholder who has the temerity and

the financial ability to seek redress in behalf of the

corporation for wrongs perpetrated on it and for debts

due it, upon payment to him of an amount equal to his

proportion of the claimed recovery in behalf of the

corporation, leaving the other stockholders, who are

entitled to the benefit of a recovery in said suit, to

incur the risk and expense of bringing another suit

and the further risk of being held barred by laches

if they do so. The procedure countenanced in this case

makes it impossible for any small minority stockholder

or stockholders to compel restitution to the corpora-

tion of the amount due to it, because it permits the

dominant majority stockholder to end each such litiga-

tion by electing to pay only the share or shares of the

plaintiff or plaintiffs in the claimed recovery.

It is too stringent a requirement that each mi-

nority stockholder, in order to obtain his share of what

is due his corporation, must be willing and financially

able to take on himself the heavy burden of such liti-

gation.

12

Pacific Railroad of Missouri y. Missouri Pacific

Railway Co., 111 U. S., 905; 28 L. Ed., 498, 504.

In protecting the dominant majority stockholder

trom the consequences of its own wrongs and result-

ing obligations the decree of the District Court and

the judgment of the Court of Appeals disregards the

important and established law that “The corporation

is a person and its ownership is a conductor that makes

it impossible to attribute an interest in its properties

to its members.”

Klein v. Board of Tax Supervisors, 282 U. S., 19;

51S. Ct. 15, 16; 75 L. Ed., 140.

Donnell v. Herring-Hall Marvin Safe Company,

208 U. S., 267, 273; 52 L. Ed., 481, 487.

And in disregarding this essentia) characteristic

of a corporation with the result that the dominant

majority stockholder is shielded from the consequences

of his own wrongs and resulting obligations, these

Courts refuse to consider the fact that the corporation

has, or may have, creditors entitled to look to the re-

covery for payment of debts due to them, and the fur-

ther fact that the government is or may be entitled

to income tax running into millions of dollars upon

receipt, by the corporation, of the $15,554,681.58, con-

ceded for the purposes of the special motion to be due

toit. (R. 431,432).

To the argument that individual relief to the mi-

nority stockholder “might prejudice the rights of

creditors” and hamper or defeat the right of the gov-

13

ernment to collect income taxes, the answer of the

Court of Appeals was that it regarded this argument

“as beside the point.” In other words, according to the

opinion and holding of this Court, it was of no conse-

quence in deciding whether corporate entity should be

disregarded that the claims of ordinary creditors of

the corporation might be prejudiced or that the obli-

gation to pay income tax to the government might be

avoided.

To the contrary, the rights of creditors and the

holders of claims against the corporation “are para-

mount and their claims should be first satisfied,” and

in order that their claims may be safe-guarded corpor-

ate entity should not be disregarded by permitting a

minority stockholder to sue for and recover only his

pro rata share of what is due the corporation.

Boatright v. Steinite Radio Corp., 46 Fed. (2d)

385, 388 (C. C. A. 10th Cire.)

Nor will corporate entity ever be disregarded

when to do so will defeat or hamper the collection of

taxes.

Burnet v. Com. Imp. Co., 287 U. S., 415; 53 S. Ct.

198; 77 L. Ed., 399.

Klein v. Board of Tax Sup’rs., 282 U. S., 19; 51

S. Ct., 15, 16; 75 L. Ed., 140.

Consumers Constr. Co. v. Comm. of Int. Rev., 94

Fed. (2d) 731, 734 (C. C. A. 1st Cire.

Old Colony Tr. Co. v. Comm. of Int. Rev., 69 Fed.,

(2d) 699, 701-2 (C. C. A. 1st Cire.)

14

The process of reasoning, by which the Court of

Appeals arrives at its conclusion is that the minority

stockholder in bringing suit acts in “a dual role,” and

seeks both to redress a wrong to the corporation and

to himself as a stockholder therein. From the as-

serted right on the part of the minority stockholder

“at his pleasure” to continue the prosecution of the

suit or to compromise, abandon or discontinue it until

some other stockholder intervenes, the Court of Ap-

peals draws its conclusion that the trial Court, against

the will of such stockholder, has the power “to decree

a dismissal of the plaintiff’s bill upon payment in full

of all of his individual damages.” (R. 431). Assuming

the soundness of the premise, the conclusion is an

obvious non-sequitur. The rule stated, and the au-

thorities cited, give the minority stockholder the option

of continuing the suit in the primary right of the cor-

poration, if he sees fit to do so. It does not and should

not give the wrong-doing dominant stockholder the

option to convert a suit in the primary right of the

corporation into a suit in the secondary right of the

individual stockholder to the detriment of other stock-

holders who have not joined, but to whose benefit the

recovery would enure, and to the detriment of credi-

tors of the corporation for debts due to them, includ-

ing the very large indebtedness that would or con-

cededly may accrue to the government for income

‘axes On the amount recovered in consequence of the

suit. To say that the majority stockholder has the

right at his election to dispose of the suit in the right

of the corporation upon the basis of declining to prose-

cute it further at his own expense and risk, is a very

different thing from saying that he can be forced to

15

ee PRET ae PORES TI

abandon the assertion of the primary right of the

corporation, regardless of its effect on other stock.

holders and creditors.

A minority stockholder suing in the right of the

corporation is a trustee, whose position in the suit is

“the precise equivalent of the guardian ad litem.”

Whitten v. Dabney, 171 Cal., 621; 154 Pac, 312,

316.

He does not bring such a suit because his rights

have been violated, or because the cause of action is

his, or because he is entitled to relief.

United Copper Securities Co. v. Amalgamated

Copper Co., 244 U. S., 261, 263.

Dana v. Morgan, 232 Fed., 85 (C. C. A. 2nd Cire.)

3 Pomeroy’s Eq. Juris. (4th Ed.) Sec. 1095, p.

2524-5.

Such a suit “can only be maintained on the ground

that the rights of the corporation are involved. * * *

The relief asked is on behalf of the corporation, not

the individual stockholder; and if it be granted, the

complainant derives only an incidental benefit from

x”

City of Davenport v. Dows, 85 U. S. (18 Wall).

626; 21 L. Ed., 938.

Dickerman v. Northern Trust Co., 176 U. S., 181,

188; 44 L. Ed., 429; 20S. Ct., 311.

16

Delaware & Hudson Company vy. Albany and

Susquehanna Railroad Company, 213 U. S., 435,

447,

The measure of relief that can be granted in a

stockholder’s suit for the benefit of the corporation is

‘such only as could be granted to the corporation if it

were complainant.

Collins v. Penn.-Wyoming Copper Co., 203 Fed.,

726, 729.

“The suit, when brought by stockholders, is still

a suit to enforce a right of the corporation and to

recover a sum of money due to the corporation;

and the corporation is a necessary party, in order

that it may be bound by the judgment.”

Porter v. Sabin, 149 U. S., 478, 478; 37 L. Ed.,

815, 818.

It is only when the corporation could maintain the

suit in its own right that a minority stockholder can

maintain a derivative suit.

Gallagher v. Pacific American Co., 97 Fed. (2nd)

193 (C. C. A. 9th Cire.)

The controversy is between the corporation and

the party whose acts are complained of, and the cor-

poration is the beneficial plaintiff though joined as a

party defendant.

City of Davenport v. Dows, 85 U. S., (18 Wall.)

626; 21 L. Ed., 938.

17

Bs tN AL BR SA. TR SO ORS SLT HN CAME GRE TE PRE 1 Sait GAS ADR BA

Sias v. Johnson, 86 Fed. (2d) 766 (C. C. A. 6th

Circ.)

Arnstein v. Bethlehem Steel Corp, 18 Fed. Supp.,

916 (D.C. E. D. N. Y.)

The value of the corporate rights involved, not the

value of plaintiff’s stock, determines the amount in-

volved for jurisdictional purposes.

Hutchinson Box Board and Paper Co., v. Van

Horn, 299 Fed., 424 (C. C. A. 8th Cire.)

Johnson v. Ingersoll, 63 Fed. (2d) 86 (C. C. A.

7th Cire.)

Any money judgment or final relief runs in favor

of the corporation, not in favor of the minority stock-

holder.

Dana v. Morgan, 232 Fed. 85 (C. C. A. 2nd Cire.)

Wilhelm v. Consolidated Oil Corp., 84 Fed. (2d)

739, 748 (C. C. A. 10th Cire.)

Arnstein v. Bethlehem Steel Corp., 18 Fed. Supp.,

916 (D. C. E. D. N. Y.)

Graham v. Dubuque Sp. Mach. Works, 138 Ia., 456,

114, N. W., 619, 621.

Harding v. American Glucose Co., 182 IIl., 551; 55

N. E. 577, 603.

3 Pomeroy’s Eq. Juris. (4th Ed.) Sec. 1095, p.

2524-5.

18

es - A ciobe SEAR ANTS tse ost ROE RA iN aiy ie C5 CRA

ERIS INF area Sh SEN eI Ra RL ABN Tar Ne RAIN Pe! A) ES PGE RR aR Re IEE et

And it is reversible error to enter judgment in

favor of the complaining stockholder in proportion to

his stock ownership.

United Copper Securities Co. vy. Amalgamated

Copper Co., 244 U.S., 261,263.

Wilhelm v. Consolidated Oil Corp., 84 Fed. (2d)

739, 748 (C. C. A. 10th Cire.)

Chicago Macaroni Mfg. Co. v. Boggiano, 202 IIl.,

312; 67 N. E., 17.

In upholding the decree of the District Court dis-

posing of plaintiff’s suit as a minority stockholder of

The Midwest Refining Company by dismissing his

amended bill of complaint on payment into Court of a

pro rata part of the claimed recovery on behalf of The

Midwest Refining Company plus counsel fees and ex-

penses, the Circuit Court of Appeals for the First Cir-

cuit disregarded the essential nature of the suit as a

suit in the right of the corporation and, in effect, con-

verted it into a suit by plaintiff in his individual right.

This could only be done by disregarding the corporate

entity of The Midwest Refining Company, for cer-

tainly it is the rule “most important in business and

law,” that a “corporation is a person and its owner-

ship is a conductor that makes it impossible to at-

tribute an interest in its property to its members.”

The basis for disregarding corporate entity of

The Midwest Refining Company which is asserted in

the special motion is that the acceptance of liquidating

dividends by all stockholders except those who had

voted against the inequitable sale, the filing of valua-

19

wis) Sh Rated ER eee >

tion proceedings by Norwin S. Bean, and the purchase

pending suit of the stock of all other stockholders who

iad voted against such sale except that of plaintiff left

only the plaintiff to benefit by the further prosecution

of the suit, and that as his share was only a small part

of the expense defendants would necessarily incur to

defend the suit on its merits, it would be an uncon-

scionable hardship for the court to continue the suit

in the primary right of The Midwest Refining Com-

pany, when defendants were willing to pay plaintiff

his pro rata share of any recovery to which said cor-

poration was entitled with costs and counsel fees. As

already pointed out in the foregoing petition, defend-

ants offered no evidence whatsoever in regard to the

expense to which they would be put in the further de-

fense of the suit and the record affords no basis in

fact for the contention that the defense of the suit on

the merits would be unduly burdensome. No more is

ijt made to appear that the plaintiff alone is entitled

to the benefits of a recovery of the fifteen and a half

million dollars recoverable in the right of the corpora-

tion, The Midwest Refining Company. In the event

of recovery in the right of the corporation, all debts

of the corporation including claims for income taxes

would be payable therefrom, and such creditors have

a prior claim to that of the plaintiff.

Boatright v. Steinite Radio Corp., 46 Fed. (2d)

385, 388 (C. C. A. 10th Circ.)

Furthermore, if it be assumed, without allegation

or proof, that there were no such creditors and that

receipt by The Midwest Refining Company of the fif-

teen and a half million dollars alleged to be due to it

20

EE aiaiianns

would create no liability for income tax, it is still not

true that the plaintiff alone is interested in and en-

titled to participate in the recovery of this fifteen and

a half million dallars.

It appears from the motion itself (R. 290-293) that

there are fourteen stockholders owning 122 shares not

represented or voting at the meeting at which the

offer of Standard Oil Company to purchase all assets

of The Midwest Refining Company was accepted; and

from the amended complaint (R. 262) that there are

two stockholders, owning 17 shares who voted for the

sale, beside the eight directors each with a nominal

ownership of one share.

If Standard Oil Company owes The Midwest Re-

fining Company over ten million dollars in interest and

on account of the other wrongs alleged to have been

perpetrated by it, these stockholders are certainly en-

titled to their share of it. A fortiori, if Standard Oil

Company owes The Midwest Refining Company over

five million dollars, on account of the agreed purchase

price, these stockholders have done nothing to forfeit

their share in it. They are still stockholders of The Mid-

west Refining Company and as such are entitled to

share in any moneys due it. Regardless of whether or

not the minority stockholders accepted their liquidat-

ing dividends, they still have a stockholder’s interest in

the assets of the corporation and, therefore, an indirect

interest in any amounts still due to it.

Those stockholders who received their liquidating

dividends by thus accepting part only of what was due

them did not forfeit their share in the additional $15,-

21

Pret et

554,681.58 stipulated for the purposes of the special

motion to be due by Standard Oil Company to The

Midwest Refining Company. They did not forfeit their

rights by not accepting May’s invitation to join in the

suit. The suit was for the benefit of the corporation

and incidentally for the benefit of all stockholders, re-

gardless of whether they intervened therein, and it was

accordingly not essential to their rights to share in

the fruits of a recovery that they first intervene in

said suit.

Southern Pacific Co. v. Bogert, 250 U. S., 483, 489-

90; 63 L. Ed., 1099.

Klein v. Board of Tax Sup’rs., 282 U. S. 19; 518.

Ct., 15, 16; 75 L. Ed., 140.

Donnell v. Herring-Hall Marvin Safe Co., 208 U.

S., 267, 273; 52 L. Ed., 481, 487.

But if plaintiff were the only stockholder entitled

to insist that Standard Oil Company pay its indebted-

ness to The Midwest Refining Company there would

be no case for disregarding its corporate existence. It

is only in exceptional cases that corporate entity will

be disregarded where to do so will prevent a circum-

vention of public policy, or prevent a fraud, or when

one corporation is in fact nothing but the agency of

another,

Consumers Construction Co. v. Commr., of Int.

Rev., 94 Fed. (2d) 731, 734 (C. C. A. Ist Cire.)

Gillis v. Jenkins Petroleum Process Co., 84 Fed.

(2d) 74 (C. C. A. 9th Cire.)

22

AUR AaASSOR AIDS AT ace seat CO IS eR EIR Set CY! NE AO AE ANG ELC MELD a Ae) 1 ROGET Ry gee

Burnet v. Commonwealth Imp. Co., 287 U. S., 415;

53 S. Ct., 198; 77 L. Ed., 399.

Old Colony Trust Co. v. Comm. of Int. Rev., 69 Fed.

(2d) 699, 702 (C. C. A. Ist Cire.)

Majestic Co. v. Orpheum Circuit Inc., 21 Fed. (2d)

720, 724 (C. C. A. 8th Cire.)

Ulmer et al. v. Lime Rock R. R. Co., 98 Me., 579;

57 Atl, 1001.

Corporate entity will never be disregarded to fur-

ther, or to protect against a fraud or other wrong, or

to shield a majority stockholder from paying in full

what he owes the corporation.

In re Collins, 75 Fed. (2d) 62, 64 (C. C. A. 8th Circ.)

Boatright v. Steinite Radio Corp., 46 Fed. (2d)

385, 386 (C. C. A. 10th Cire.)

The amended complaint seeks relief in the right

of The Midwest Refining Company from conduct of

its dominant majority stockholder which constituted

an actual, intentional fraud on The Midwest Refining

Company. Corporate entity should not be disregarded

to shield such a wrong doer from the consequences of

his own wrong.

But if the complaint had sought relief from con-

duct of the dominant majority stockholder which en-

titled The Midwest Refining Company to “relief by

the application of equitable principles” as held by the

lower court (R. 305) and, by the Court of Appeals

(R. 428) the Court should not have disregarded the

23

corporate entity of The Midwest Refining Company

to permit Standard Oil Company to escape in large

measure the consequences of such inequitable conduct.

Nor should corporate entity be disregarded so as

to deny The Midwest Refining Company the right to

recover over five million dollars of the purchase price

which Standard Oil Company agreed to pay but did

not pay The Midwest Refining Company for its assets,

according to the allegations of the amended bill.

The effort of the corporation, acting through a

minority stockholder, to collect a large indebtedness

due to it by a majority stockholder presents no such

unusual condition as would justify the disregard of cor-

porate entity, unless it can properly be said that such

exceptional condition is created by the fact that the

majority stockholder owns all but a small percentage

of the outstanding stock. Such basis for disregarding

the corporate entity of The Midwest Refining Com-

pany is expressly disclaimed by the Circuit Court of

Appeals (R. 428) and it is well settled that corporate

entity will not be disregarded either at law or in equity

simply because the stock is owned by one or by a few

rather than by many stockholders.

Burnet v. Commonwealth Imp. Co., 287 U. S., 415;

53 S. Ct., 198; 77 L. Ed., 399.

Old Colony Trust Co. v. Comm. of Int. Rev., 69 Fed.

(2d) 699, 702 (C. C. A. 1st Cire.)

Majestic Co. v. Orpheum Circuit, Inc., 21 Fed. (2d)

720, 724 (C. C. A. 8th Cire.) and cases cited.

24

_ Vr aem wee bisa Pital. So CR te IDC se SEITE MLE AED LAE Ne Eh! CS AGERE DID *

Ulmer et al. v. Lime Rock R. R. Co., 98 Me., 579;

57 Atl, 1001.

Nor does the acquisition of a large majority of

the stock confer on such majority stockholder any

equity to disregard corporate entity and thereby

escape, in whole or in part, his obligation to the cor-

poration arising out of his breach of trust as dominant

stockholder, or arising out of his contract with the

corporation.

Moore v. Los Lugos Gold Mines Co., 172 Wash.,

570; 21 Pac. (2d) 253.

Theis v. Spokane Falls Gas Light Co., 34 Wash.,

23; 74 Pac., 1004.

In re Paine, 200 Mich., 58; 166 N. W., 1036.

In re Doe Run Lead Co., 283 Mo., 646; 223 S. W.,

600.

Thomas H. Mason v. Pewabie Mining Co., 133 U.

S., 50; 33 L. Ed., 524.

Cox v. Stokes, 156 N. Y., 491; 51 N. E., 316, 323.

To establish such a rule would place the small mi-

nority stockholder at the mercy of the dominant ma-

jority.

In re Doe Run Lead Co., 283 Mo., 646; 223 S. W.,

600.

Theis v. Spokane Falis Gas Light Co., 34 Wash.,

23; 74 Pac., 1004.

25

NARADA EL INTENTS ARE AGERE TOES ISS REL ISREG a ERNE ti

In re Paine, 200 Mich., 58; 166 N. W., 1036.

Kavanaugh v. Kavanaugh Knitting Co., Inc., 296

N. Y., 185; 128 N. E., 148, 152.

Ervin v. Oregon Ry. & Nav. Co., 20 Fed., 577; 27

Fed., 625 (C. C. S. D. N. Y.)

MacArthur et al. v. Port of Havana Docks Com-

pany, et al., 247 Fed., 984 (D. C. D. Maine, S.D.)

Allied Chemical & Dye Corp. v. Steel & Tube Co.,

of Amer., 14 Del. Ch 1; 120 Atl., 486, 491-2.

The special motion of defendants, based upon

which the lower court dismissed the amended com-

plaint, conceded the right of The Midwest Refining

Company to recover from Standard Oil Company for

the several wrongs alleged to have been perpetrated

on it, and for unpaid purchase price, an amount ag-

gregating $15,554,681.58, according to stipulation (R.

389-90). It was error to dismiss the amended bill on

payment of $1246.22 into Court for plaintiff and the

further payment of his counsel fees and expenses.

Both the District Court (R. 305) and the Circuit

Court of Appeals (R. 427) denied the right to strike

prayers (b) and (c) upon the theory asserted by de-

fendants in their special motion, viz., that plaintiff by

not filing a written dissent from the sale must be

deemed to have assented to it, and so can have no relief

in equity against such sale (R. 292), and in so doing

were supported by abundant authority.

MacArthur et al. v. Port of Havana Docks Com-

pany, et al., 247 Fed., 984 (D. C. D. Maine, S. D.)

26

—SEo7~”” RLM a dae UA i ONC RNS OPO Ri AE AEN AINE

Mason v. Carrothers, 105 Me., 392; 74 Atl., 1030.

Eagleson v. Pacific Timber Co., 270 Fed., 1008,

1010 (D. C. Del.)

Allied Chemical and Dye Corp. v. Steel & Tube Co., of

Amer., 14 Del. Ch. 1; 120 Atl., 486.

Kavanaugh v. Kavanaugh Knitting Co., Inc., 226

N. Y. 185, 128 N. E., 148.

Theis v. Spokane Falls Gas Light Co., 34 Wash.

23; 74 Pae., 1004.

In re Paine 200 Mich. 58; 166 N. W., 1036.

In re Doe Run Lead Co. 283 Mo., 646; 223 S. W.,

606, 609.

Both Courts agreed (R. 305 and R. 427) that the

amended bill stated a case for equitable relief under

said prayers, but concurred in striking out and dis-

missing them upon the assumption that the court was

justified in exercising its power “to withhold its

equitable relief of rescission, even though a case for

such relief is made out, when it appears that to grant

such relief would impose a- burden upon defendant

wholly out of proportion to the benefit which that re-

lief would confer upon the plaintiff.” (R. 428). Both

assumed that the allegations of the bill as amended

no longer showed a sale by a dominant majority stock-

holder to himself upon an inadequate consideration.

As to the first assumption there was no evidence

offered by defendants to support the allegations of

hardship which are averred in the special motion, the

27

st

ex parte affidavits, which alone were offered in sup.

port of said motion, being entirely silent on the subject.

The second assumption is contradicted by the allega-

tions of the amended bill. While the amendment did

withdraw the general allegation that the sale of “lands,

leases and concessions” of producing and non-produc-

ing acreage (R. 15) and certain other property includ-

ing patents, copyrights, franchises, contracts and good

will (R. 16) was for greatly less than their true value, it

retained the specific allegation that the consideration

was inadequate at least to the extent of millions of

dollars of interest which Standard Oil Company owed,

but for which it did not agree to pay anything (R. 266,

Par. XII). This allegation brings the case made by

the amended bill squarely within the rule that where

a sale is made by a dominant stockholder to himself

“inadequacy of price is unfairness, and condemned

without further inquiry in an attempt to determine

whether due to corruption or honest, but mistaken,

judgment unconsciously swayed by adverse interest.

There is no safety otherwise.”

Geddes v. Anaconda Copper Mining Company, 222

Fed., 129, 133; 254 U. S., 590, 600, 602.

As dominating stockholder Standard Oil Com-

pany was in the position of a trustee for The Midwest

Refining Company and for the minority stockholders.

Pepper v. Litton, 308 U. S., 295, 306; 60 S. Ct., 238,

245.

Southern Pacific Co. v. Bogert, 250 U. S., 483;

63 L. Ed., 1099.

28

MacArthur et al. v. Port of Havana Docks Com-

pany, et al., 247 Fed., 984 (D. C. D. Maine, S. D.)

Hyams v. Calumet & Hecla Mining Co., 221 Fed.,

529, 587 (C. C. A. 6th Circ.)

Alaska Juneau Gold Mining Co. v. Ebner Gold

Mining Co., 239 Fed., 638, 643 (C. C. A. 9th Circ.)

Wheeler v. Abilene National Bank Bldg. Co., 159

Fed., 391, 398 (C. C. A. 8th Circ.)

Stebbins v. Michigan Wheelbarrow and Truck Co.,

212 Fed., 19, 28 (C. C. A. 6th Circ.)

Sidell v. Missouri Pacific Ry. Co., 78 Fed., 724,

(C. C. A. 2nd Cire.)

Blanstein v. Pan American Pet. & Tr. Co., 21 N.

Y. S. (2d) 651, 712-3.

According to the allegations of the bill this dom-

inant stockholder sold to itself and its controlled sub-

sidiary all of the assets of The Midwest Refining Com-

pany, a going and prosperous corporation, for the pur-

pose of acquiring its assets and business for itself free

of the minority stockholders, without any effort what-

soever to find any other purchaser and by private sale

at which no other purchaser: was given the opporunity

to bid. It could not thus use its power for its “personal

advantage and to the detriment of the stockholders”

no matter how meticulous it may have been “to satisfy

technical requirements.”

Pepper v. Litton, 308 U. S., 295, 311; 60 S. Ct., 238,

247,

29

PCE i SAE TOT Sect ——

And this is true though the sale were made strictly

according to the terms of a statute authorizing a sale

of all assets of the corporation on the vote of a ma-

jority of the stockholders or directors. :

MacArthur et al. v. Port of Havana Docks Com-

pany, et al., 247 Fed., 984 (D. C. D. Maine, S. D.)

Theis v. Spokane Falls Gaslight Co., 34 Wash., 23;

74 Pac., 1004.

In re Paine, 200 Mich., 58; 166 N. W., 1036.

In re Doe Run Lead Co., 283 Mo., 646; 223 S. W.,

600, 609.

Kavanaugh v. Kavanaugh Knitting Co., Inc., 226

N. Y., 185; 123 N. E., 148, 152.

Ervin v. Oregon Ry. and Nav. Co., 20 Fed., 577;

27 Fed., 625 (C. C. S. D. N. Y.)

Allied Chemical & Dye Corp. v. Steel & Tube Co.

of Amer., 14 Del. Ch. 1; 120 Atl., 486, 491-2.

While the minority stockholders under such

statutes take the risk of a sale to a third party in good

faith, they should not be compelled to take the risk of

loss from the cupidity of a fiduciary selling to himself,

or the risk of being able to prove actual fraud or in-

adequacy of consideration at enormous expense to

themselves.

Geddes v. Anaconda Copper Min. Co., 222 Fed,

129; 254 U. S., 590, 600-2.

Pearson v. The Railroad, 62 N. H., 537, 540.

30

ae omens 7 a

SE can OER nanan

Story’s Eq. Juris., Sec. 322.

Nor should they be compelled to take the risk of

loss from a sale where no effort whatsoever is made

to find a purchaser other than the dominant stock-

holder, but all possible competition is stifled by a pri-

vate sale to the dominant stockholder at a price fixed

by it.

Sidell v. Missouri Pac. Ry. Co., 78 Fed., 724 (C. C.

A. 2nd Cire.).

Hyams vy. Caltimet and Hecla Min. Co., 221 Fed.

529, 542 (C. C. A. 6th Cire.).

The power of such a fiduciary “is at all times sub-

ject to the equitable limitations that it may not be exer-

cised for the aggrandisement, preference or advantage

of the fiduciary to the exclusion or detriment of the

cestuis. Where there is a violation of those principles,

equity will undo the wrong or intervene to prevent its

consummation.”

Pepper v. Litton, 308 U. S. 295, 311; 60 S. Ct., 238,

247.

Not only are the dealings of such dominant stock-

holders subject to “rigorous scrutiny” but “where any

of their contracts or engagements with the corporation

is challenged the burden is on the * * stockholder not

only to prove the good faith of the transaction but also

to show its inherent fairness from the view point of

the corporation and those interested therein * *. The

essence of the test is whether or not under the circum-

stances the transaction carries the earmarks of an

31

FE A AF CRE IS FT EA TG ET ME 4 IP 5A Woke ears, ott

ECR ARS

Tams)

arm’s length bargain. If it does not, equity will set it

aside.”

Pepper v. Litton, 308 U. S., 295, 306; 60 S. Ct., 238,

245.

Geddes v. Anaconda Copper Mining Company, 254

U. S., 590, 599; 41 S. Ct., 209, 212; 65 L. Ed. 425,

The complaint as amended according to the ex-

press holding of both the District Court and the Cir-

cuit Court of Appeals is “sufficient in allegation at

least to support a charge of unfair treatment and to

entitle the plaintiff to ‘relief by the application of

equitable principles’.” (R. 305, 428).

Defendants in their special motion make no at-

tempt to meet the burden of showing either good faith

or the inherent fairness of the sale from the view point

of the corporation and the minority stockholders and

from the allegations of the amended complaint it defi-

nitely appears that the sale, absolutely dominated as it

was by the majority stockholder Standard Oil Com-

pany, carried none of “the earmarks of an arm’s

length bargain.”

As a consequence of the natural advantage held

by a dominant majority stockholder numerous strate-

gies have been successfully devised to prevent the pros-

ecution of minority stockholders suits to a conclusion

on the merits. For this reason, the remedy provided

by such suits has never been entirely effective or ade-

quate.

SINTRA Ba «TE DS VE TET CG MEY ARES ONS HALES A SOME ERITREA

41 Columbia Law Review, 405, 421, 422.

The present decision goes beyond all others and

practically takes away the remedy of small minority

stockholders seeking to redress wrongs to their cor-

porations by permitting the dominant stockholder, who

has perpetrated such wrongs, at its election, to force

a dismissal of the suit upon the payment of a pro rata

part of what the corporation is entitled to recover with

the result that the dominant stockholder being caught

is forced “to disgorge part of his (its) profits” but “is

still financially better off than if he (it) had remained

honest.”

41 Columbia Law Review, 405, 427.

Respectfully submitted,

HARRY T. SMITH

WILLIAM G. CAFFEY

WILLIAM B. SKELTON,

Attorneys for Petitioner.