William H. Lothrop, the husband of the complainant, in March, 1881, then in the employ of Roberts, Throp Co., a corporation organized and existing under the laws of this State, purchased 240 shares of stock in said corporation, of the face value of $6,000, and of the actual value of $9,000, which last-named sum he paid for said stock. He continued in the employ of said corporation until November 27, 1882, when he died. The business of the corporation is located at Three Rivers, where Lothrop resided at the time of his death. Lothrop left surviving him his widow, the complainant, since remarried, and two children, now aged 12 and 15 years respectively, and residing with their mother.
When Lothrop died, the principal part of his estate consisted of this stock. Inventorying this stock at $9,000, his estate was appraised at $14,110.40, $229.10 of which was household furniture, and consisted entirely of personal *Page 76 property. There were $4,180.85 of debts proved against his estate. Up to the present time the widow has been unable to sell this stock at its cost. No dividend has ever been declared upon it. The debts are unpaid and drawing interest, and she has been obliged to increase her indebtedness in order to support herself and her children.
She filed the bill in this cause in December, 1887, as administratrix of the estate of Lothrop, praying that the circuit court in chancery for the county of St. Joseph inquire into and ascertain what amount of the surplus profits and earnings of said corporation are now on hand under the control of said corporation; and that the persons acting as its managers and directors (who are also made parties defendant with the corporation) be required to account and make showing of all the moneys and property of said corporation now held and owned by it; and that it be decreed that the directors of said corporation be ordered and required to pay on the stock of said corporation held by her as such administratrix, and the other stockholders thereof respectively, such dividend as to the court might seem proper.
The undisputed facts as to the existence and management of this corporation show a peculiar state of things, to say the least. The corporation was organized in 1875, for the purpose of manufacturing and selling agricultural implements, and the period of its corporate existence was fixed at 30 years. The capital stock was fixed at $250,000, and consisted of 10,000 shares, at $25 each. The full amount of stock subscribed for was $80,000, all of which has been paid up. No certificates have ever been issued for a greater amount than $80,000. The stock was at first owned entirely by two families, Roberts and Throp. In 1881, Throp and his sons, who owned half, sold out to Roberts. At this time all the surplus *Page 77 profits and accumulations were taken out and divided among the stockholders, but it was considered after this was done that the stock was worth $1.50 upon the dollar, and Roberts paid the Throp family $60,000 for their $40,000 of stock. He then sold some of the stock to other parties, at the same value at which he purchased it, Lothrop paying $9,000 for $6,000 of stock at face value. The stockholders, as shown by the annual report filed January 28, 1888, outside of the Roberts family were: Joseph W. French, 400 shares; C.L. Blood, 280 shares; William H. Lothrop estate, 240 shares; C. Schafer, 43 shares; and M.H. Bumphrey, 25 shares. The directors December 31, 1881, were Cyrus Roberts, George A. Roberts, Samuel H. Roberts, James B. Roberts, Horace Roberts, and Joseph W. French.
The by-laws provide that there shall be elected for the first year six directors, who shall be chosen annually, according to law, on the second Tuesday in December in each year. There has never been a meeting of the stockholders, as appears by the records of the company, since March 26, 1881. There is in the records a meeting headed "Special Directors' Meeting," held November 14, 1887, which was called to order by Cyrus Roberts, president.
"Present: Cyrus Roberts, George A. Roberts, James B. Roberts, J.W. French.
"Minutes read and approved. Moved by J.W. French, and seconded by James B. Roberts, that we proceed to a formal ballot for director to fill vacancy. George A. Roberts acted as teller, and announced four ballots as having been cast, of which C.L. Blood received four ballots, and was announced as unanimously elected.
"Moved by J.W. French, and seconded by James B. Roberts, that we do now adjourn. Carried.
"M.H. BUMPHREY, Secretary."
The secretary, Bumphrey, testifies that there was a stockholders' meeting on December 13, 1887, but there is *Page 78 no evidence that any one was notified or attended except the directors and secretary. This was after the filing of the bill in this cause. The directors elected in 1881 have held over and managed the corporation ever since the first election, in March, 1881, and it seems to have been managed principally in the interest of the Roberts family. Cyrus Roberts is president; salary, $800. One of his sons is treasurer; salary, $1,000. Another is foreman of the shops, at $15 per week. Bumphrey is secretary, at $1,000 per year. French and Blood are now directors, leaving the complainant and Schafer, who has 43 shares, the only stockholders left out of active participation in the management of the corporation. The by-laws also prescribe that the directors shall meet on the first Monday evening of every month. There has never been a regular meeting of the directors since their election. They held four special meetings in 1881, March 26, March 28, May 26, and December 19; one April 6, 1882, July 29, 1885, and November 14, 1887, at which last meeting a director was elected to fill vacancy without authority to do so.
The annual statements filed by the directors or a majority of them in each year show as follows:
Year ending December 31, 1881:
Capital stock paid in_____________________ $80,000 00 Liabilities_______________________________ 39,613 55
1882:
Capital stock paid in_____________________ 80,000 00 Liabilities_______________________________ 74,056 40
1883:
Capital stock paid in_____________________ 80,000 00 Liabilities_______________________________ 59,787 65
1884:
Capital stock paid in_____________________ 80,000 00 Liabilities_______________________________ 71,962 45 *Page 79 1885:
Capital stock paid in______________________ $80,000 00 Invested in real estate____________________ 26,875 15 Personal estate____________________________ 56,111 46 Debts______________________________________ 93,825 12 Credits____________________________________ 235,285 43
1886:
Capital stock paid in______________________ 80,000 00 Invested in real estate____________________ 27,231 99 Personal estate____________________________ 62,427 96 Debts______________________________________ 108,032 81 Credits____________________________________ 263,780 96
1887:
Capital stock paid in______________________ 80,000 00 Invested in real estate____________________ 27,869 42 Personal estate____________________________ 62,964 36 Debts______________________________________ 81,006 91 Credits____________________________________ 263,171 79
1888:
Capital stock paid in______________________ 80,000 00 Real estate________________________________ 28,532 74 Personal estate____________________________ 56,444 21 Debts______________________________________ 51,623 18 Credits____________________________________ 191,651 16
The last report was made January 25, 1889, about a year after this suit was commenced. All these reports except the last are sworn to as true by either the secretary or treasurer, except 1885, 1886, and 1887, which are sworn to by the secretary, Bumphrey, to be "true and correct, to the best of my knowledge and belief." The last one does not appear to be sworn to at all, but this may be a mistake of the record, as it does not appear to be signed by any one. These statements, which ought to be presumed to be true, show that at the close of the year 1887, about the time this bill was filed, this corporation had, in excess of its capital stock, real and personal property to the amount of over $10,000, and credits exceeding its indebtedness in the sum of $182,164.88; and *Page 80 yet it is not able to declare a dividend. But this is not all. We have in the record the balance-sheets of the corporation at the close of business from the year 1881 to 1888, inclusive. It starts in 1881 with a capital stock of $80,000, and $40,000 surplus. This surplus is supposed to represent the added value of the shares when Roberts bought out the stock of the Throp family, and may or may not amount to anything. It is claimed by the defendants that this only represents an estimated value which may be fictitious, but complainant contends that it is real and substantial, and represents in fact so much value. The net gain figured for that year was $17,744.46, which, added to the capital and surplus, made a basis of $137,744.46 net capital for the year 1882. The net gain for that year was $50,352.59, which started 1883 with a net capital of $188,097.05. The net gain for 1883 was $28,249.02, making net capital for 1884 $202,726.69, as shown in the report. In 1883 appears for the first time an item called "Suspense Account," of $13,619.38, which seems to have reduced the net capital to the figures given above. The net gain for 1884 was $20,728.39; starting 1885 with a net capital of $223,455.08, the suspense account remaining the same as in 1883. In 1885 the net gain was $11,317.12. Net capital for 1886, $224,446.92; suspense account increasing to $23,944.66. In 1886 net gain $20,961.18. Net capital for 1887, $245,408.10. Suspense account same as 1885. In 1887 net gain $3,645.90. Net capital for 1888, $249,054. Suspense account same as 1885. In 1888, in the report filed after the commencement of this suit, we find the first loss. Net loss $47,993.73; leaving net capital for 1889, $201,060.27. Suspense account, $23,944.66. One of the directors accounts for this loss in his testimony. It was made up of losses in Texas upon corn-shellers for the years 1886 and 1887, and not charged until 1888, and of notes before that *Page 81 time, classed as "bills receivable," and which were considered worthless and charged off as loss in 1888. The suspense account was attempted to be explained by some of the officers of the defendant, but the explanation was not very clear. The counsel for the complainant claim that it is an asset instead of a liability, which would increase the surplus of the company over and above its debts and capital stock double the amount of such account, to wit, $47,889.32. The explanation of the secretary of the corporation as to this suspense account is as follows:
"There is the suspense account. It was ten per cent. net gain in 1881 on collections, $1,774.44; ten per cent. net gain 1881, machinery and inventory, $1,774.44. Then in 1885 there was ten per cent. of the 1882 collections charged over, $5,035.25. It was not charged off the books, but held in suspense. Ten per cent. net gain of 1882, machinery and inventory, $5,035.25; ten per cent., 1883, collections, $2,824.90; ten per cent., 1883, machinery and inventory, $2,824.90; ten per cent., 1884, collections, $2,072.83; ten per cent., 1884, machinery and inventory, $2,072.83. Then there was $529.82, when I footed up to carry forward; that was an error that was not discovered until the report was entered. Instead of crediting back, I charged it, and it made the trial balance all right.
"Q. How much was this suspense account?
"A. It was $23,944.66. * * * * * *
"Q. I want to ask a little more about the suspense account. The suspense account by the figuring you have made there is charged as a liability?
"A. No, sir; not at all.
"Q. It is so much money deducted from the surplus?
"A. Yes, sir; but it stands as a separate account.
"Q. I understand it is a sort of sinking fund?
"A. No, sir; not at all. It would be a fund on the other side.
"Q. You have gone through and charged up ten per cent.?
"A. No, sir; not by any means. It was simply an estimate ordered by the board of directors. We did not *Page 82 go through and take any special account, but simply took ten per cent. of the net gain in those years included in the surplus, and held it as a suspense account.
"Q. That was held to cover any possible contingencies?
"A. Yes, sir; if we had losses.
"Q. And if you had no losses, it would be so much more money?
"A. Certainly.
"Q. So that account is held in suspense?
"A. Yes, sir.
"Q. In other words, you had that, so as to be on the safe side?
"A. I think it is a business principle that is generally exercised.
"Q. It was really an account set aside on your books?
"A. Yes, sir.
"Q. To cover any losses?
"A. Yes, sir.
"Q. Then, if you have no losses, it would not be taken out?
"A. Certainly not. You are right."
He further testified that the suspense account was simply a percentage charged up as a precaution against loss. As near as I can ascertain, this suspense account is on the right side of the column as to debits and credits, as it is charged upon the books of the corporation. It is treated as a liability, but it may not be one. The corporation has had credit for this amount in its bills receivable and inventory of property. This suspense account is 10 per cent. of the net gain of each year, charged over to the debtor side, to meet anticipated or estimated losses on such net gain as now credited on the books. If they have that amount of losses, then the balance remains as it is now; if not, this $23,944.66, or so much thereof as is not used to meet losses, is to be added to the balance as it now stands. It it not doubled when it goes back, as complainant's counsel claim. It really has never been taken out of the assets. In theory *Page 83 it has been by charging it as a debt, but even in theory it has been deducted from the credit side but once. This has been done by charging it to the debtor side of the ledger, while it still remains on the credit side among the other assets. If paid out for losses, the balance will not be disturbed on the books, unless it is charged upon the debit side again as it is paid out, and the real balance will be as now shown on the books. But I shall consider the case independently of this suspense account.
When this bill was filed, or at the end of the corporate year for 1887, the net capital of this corporation appeared by the sworn statement of its officers to be $249,054. Its real estate and personal property on hand amounted to $90,833.78, or $10,833.78 more than the capital stock paid in. Its credits exceeded its debts $182,164.88. Add to this the excess of property over capital stock, and we have $192,998.66. Now deduct from the net capital, $249,054, the capital paid in, $80,000, and we have left $169,054. Add to this the suspense account of $23,944.66 and we have again the $192,998.66. Now give the defendant corporation the benefit of the suspense account, and we still find it after its capital stock of $80,000 and all its liabilities are paid, suspense account included, with a clear surplus of $169,054, in property and credits. But it is claimed by the defendants' counsel that $40,000 of this surplus is fictitious, and never had any existence in fact. If we grant this, we still find a surplus of $129,054, earned in seven years, or an average of $18,436 per year. This $40,000 surplus arose in this way: From the organization of the corporation in 1875 up to 1881, when Roberts purchased the interest of Throp, it is admitted that large profits were made in the business. So great were these profits that Roberts, Sr., testifies that when he and Throp divided up, each taking one-half of the money and notes that belonged to the corporation, there was over *Page 84 $100,000 in notes, $50,000 each. The amount of money drawn out does not appear, but in one place he says that each drew out the money they put it, to wit, $15,000 each. He claims that he lost $15,000 on his share of the notes, but that left him $35,000 on the note account. After they had thus divided up the moneys and notes belonging to the corporation, there was still left the plant. They valued this, and the machinery, lumber, iron, and machines on hand, when the company was first started, at $50,000, and then put in $30,000 in cash, $15,000 each, thus making the capital stock paid in $80,000. There was $7,000 or $8,000 worth of improvements made in the plant before 1881. They estimated between themselves, in 1881, the plant, machinery, and personal property on hand, after taking out the moneys and notes, with the good will of the business, to be worth $120,000, and Roberts thereupon paid Throp $60,000 for his half of the capital stock. A dollar of the stock was then supposed to be really worth a dollar and a half, and it was at these figures that Roberts, after he had acquired all the stock, sold some of it to other parties, including the stock purchased by Lothrop, who gave $9,000 for $6,000 of stock. Now it is claimed that the plant and property was not worth any more than $80,000. In other words, the $40,000 that was credited up to surplus, showing the real capital to be $120,000, and upon which showing Roberts sold this stock to Lothrop and others, was a fictitious sum, and never existed in fact, although it has been carried as a surplus ever since. But, if this is so, still every dollar of the stock is now worth about 2frac78; dollars, according to the sworn statements of the company, if the credits are worth their face value. It is not claimed that the real estate and personal property is inventoried above its actual value.
The first objection against the granting of a decree in *Page 85 favor of the complainant is a technical one. It is said she has never applied to the board of directors when they were in session asking them to declare a dividend, and that application to single directors separately is not sufficient under the authorities. But it is shown by the proofs that the complainant has, by herself and through duly-authorized agents, applied to several of the directors, and those the managing ones of the corporation, to declare a dividend, and they have refused to do so, and all of them swear that they would not have declared a dividend if had applied to the board when it was in session. When we consider that there has never been a regular meeting of the directors, and but a few meetings at all, that there never has been a meeting of the stockholders except after her bill was filed, that she had no notice of this meeting, or of any meeting of the directors, that the directors own almost the whole of the stock, and can control a stockholders' meeting as easily and fully as they can a meeting of their own board, it is manifest that any action that she might have taken before a stockholders' or directors' meeting would have been futile and useless. Under such circumstances, equity does not require that she should go to the expense of any such action. "The law does not require an idle ceremony to ground an actionable right." Donkersley v. Levy, 38 Mich. 57.
It is clear to me that there has been an object in the whole course and proceeding of this corporation. There has been an evident design to "freeze cut" this small stockholder, the complainant, and she, a woman, presumably not well acquainted with her rights, nor with the strength and purpose that a man would have to assert and enforce them. This is shown by their non-compliance with the law as to both directors' and stockholders' meetings; in keeping one set of directors in, in violation of law, and calling no meeting of stockholders to elect their *Page 86 successors as their times expired; in paying no attention whatever to her rights as a stockholder under the law, treating her the same as they would an entire stranger to the transaction; in advising her to sell her stock, and offering her the munificent (?) sum of the face value of it, $6,000, with interest at 6 or 7 per cent., when her husband paid $9,000 for it. In fact, the corporation has been run in the interest of the Roberts family at the expense of this poor woman, and the directors gravely inform the court, in substance, that they must continue to so manage it or bring ruin upon the corporation. There is and can be no excuse for this conduct. Nor does it avail these directors that they "are men of high standing as business men, and of unquestioned integrity," as found by the circuit judge. The facts in this case must govern this record, and justice and equity prevail, notwithstanding the high character of the board of directors as individuals. It is plain that the usual object of a corporation is not to accumulate profits, and add them to the capital stock, but to make and divide each year, if possible, profits as dividends equally among the shareholders. If profits are made, the amount to be declared as a dividend is within the reasonable discretion of the directors, but it is admitted by the circuit judge, who dismissed complainant's bill, that —
"There can be such a condition of things as will justify a court of equity in compelling directors to declare a dividend contrary to their judgment."
The directors of a corporation have a discretionary power to a limited extent to accumulate the profits of the company, but they cannot go on accumulating them indefinitely. After a reasonable limit has been reached, every shareholder has a right to insist that they shall be distributed as dividends. 1 Mor. Priv. Corp. § 452. And the courts have a right to interfere in behalf of the *Page 87 stockholder, and order a dividend, when it is clear either that the directors have acted in bad faith or from a mistaken view of their legal duties. Id. § 460.
The question to be here decided is, was it the duty of the directors at any time to declare a dividend, and have they wrongfully refused to distribute the profits, or any part thereof? If so, the complainant is entitled to relief. It must be remembered that the record shows that this corporation was first organized on the basis of a capital stock of $250,000, but only $80,000 has ever been issued. The net capital when this bill was filed had been increased by the showing of the company upon its books to $249,054. Deducting the $40,000 (said to be speculative only, but of which complainant's husband paid his pro rata share, $3,000, when he bought his stock), and we have, in round numbers, $209,000. For this accumulation of profits or capital no stock dividends have been issued, or no new shares created. It has been simply left in the business, to be controled and managed by the directors. As far as her stock is concerned, the complainant has nothing to show for this increase, and it seems that in the estimation of the directors, or some of them, who made her offers, or put a value upon it to her attorney, her stock is not worth any more than it was before this increase, if it is worth as much.
We will now consider the excuse offered for not declaring any dividends. It seems that, when Throp sold out to Roberts, it was no serious detriment to the business to take out of it every dollar in money and all the notes, the latter amounting to over $100,000. The corporation was then thought to be worth after this stripping $120,000, one-half more than when it started, and upon that idea Lothrop bought his stock. By borrowing $1,000 the business was started anew the very next day after Roberts bought out Throp, and has flourished *Page 88 ever since, doing, according to one of the directors, the best and most profitable business it ever did in the years 1882, 1883, and 1884. Still, in the face of these facts as to the effect of this enormous division of profits in 1881 among the stockholders, then composed of the Roberts and Throp families, and their complete withdrawal from the business, it is now claimed and given in evidence by the directors that there has never been a day since when any dividend could be declared without serious detriment to the corporation, although in three years at least since that time the business has been more profitable than ever before. And yet the character of the business has not been materially changed. It is only claimed that it has been enlarged. The defendants' counsel admit the apparent net capital of $209,000 in 1887, but say that $173,000 of this represents notes taken for machines sold, called in the statements "bills receivable." They further say that it does not represent correctly the actual condition of the company for the following reasons:
"1. All the apparent surplus capital is tied up in bills receivable, taken in exchange for machines sold, and as such is subject to heavy shrinkage, not worth fifty cents on the dollar, very hard to collect.
"2. The other property of said corporation is invested in material, plant, fixtures, and machinery used in the business, and all subject to wear and tear, etc.
"3. For the reason that there were heavy losses which accrued in that and former years, amounting in the aggregate to $47,000, which had been carried forward with a hope of realizing something out of it, and was finally abandoned and charged off in 1888.
"4. While there may be nominal, there are not any actual, profits, and no one can tell whether there will be or not until the company's paper is collected, and the debts paid. There seems to be a surplus of unavailable assets, but an actual deficiency of money or anything that can be turned into money." *Page 89
During these years the statements show that in 1885 there was due, at the end of the year, from the First National Bank, —
$16,864 55 Cash on hand in safe______________________ 529 82 __________ Total__________________________________ $17,394 37 __________ In 1886: Bank______________________________________ $12,777 90 Safe______________________________________ 164 75 __________ Total__________________________________ $12,942 65 __________ In 1887: In bank___________________________________ $2,375 73 Safe______________________________________ 20 32 _________ Total__________________________________ $2,396 05 _________ In 1888: In bank___________________________________ $290 55 Safe______________________________________ 10 06 _______ Total____________________________________ $300 61
The statement in 1888 was made while this suit was in progress. Before 1885 there seems to be no account of money in bank, but each year there is shown a large amount of bills and accounts receivable. There was cash enough on hand in 1885 and 1886 to have made a very reasonable dividend upon the face value of the stock. There seems to have been no difficulty in collecting these bills receivable, so that the business was enlarged and kept in a flourishing condition. It is not to be presumed that they have allowed any of the notes to outlaw, and when the losses were charged off, after this suit was commenced, they amounted to only $47,000, and a large part of this was not from bills receivable, but the loss of goods in the Texas speculation upon corn-shellers. There is no doubt but there has been actual profits: and, even, *Page 90 conceding that the bills receivable, or time notes, will not realize any more than they did when Throp and Roberts divided up, they are still worth 70 cents on the dollar; and it must be remembered that the bills receivable on hand in 1888, after all losses are charged off, amount to over $150,000. Besides this, there are over $40,000 of accounts receivable, and over $80,000 of real estate, machinery, and merchandise on hand. The debts are $51,623.18, and the capital stock, $80,000. There is no reason why a dividend cannot be declared.
All the stockholders except this woman, and one other person, who has only 43 shares, are directors of the corporation or members of the Roberts family, with the exception of Bumphrey, the secretary, who holds 25 shares, and has been an active supporter of the past action of the company. If these men honestly think they cannot withdraw the amount of the dividends upon their stock without detriment or danger to the corporation, they can take the same in stock, and leave the money in the business. But the claim that the complainant cannot be given her proper dividend without damaging or deranging the financial condition of the corporation is nonsense. It is evident that these directors have not exercised a proper and reasonable discretion in this matter, and it is also apparent that they do not intend for some time to come, if ever, to declare any dividend. No hope is held out anywhere in their testimony that they can declare any in the future. But it is evident to my mind that they could have done so before this time from their own financial showing, and that the complainant is now entitled to one. If equity is powerless to protect this woman in her rights, then the directors of a corporation can do about as they please with the property which they have heretofore been supposed to hold as trustees for the stockholders, and the small stockholder *Page 91 is entirely at the mercy of the larger ones, who always control the management, and there is no relief. This is not equity, but oppression, sanctioned under and by the forms of the law.
The decree below ought to be reversed.
CAHILL, J. I agree with Mr. Justice MORSE in the result reached in this case. I find nothing in the record to justify the conclusion that a dividend cannot be declared on the stock without crippling the business of the corporation. The concern started in 1875, with a capital of $80,000 paid in. That sum constituted its entire resources, and with that sum it was able to start and carry on a successful business, so that in 1881 they were able to divide a handsome surplus among the stockholders without impairing the capital. In 1881 the concern again started out, and the record shows that from comparatively small beginnings the business has grown to great proportions. It may be that the corporation cannot reach out as fast and as far as its managers may wish in the way of extending and enlarging its business, and at the same time pay dividends to stockholders; but that it can carry on a business successfully to the extent it was doing when complainant's husband purchased his stock is substantially demonstrated by experience. I think complainant is entitled to a dividend. *Page 365