Hazlehurst v. Savannah, Grippin & North Alabama Railroad

McCay, Judge.

1. We think the Judge was right in overruling the demurrer. There is clearly equity in the bill. There is a distinct charge of fraud and combination between Mr. Hazlehurst and the contractors, in the receipt of the road in an unfinished condition, and in the issue, without authority and fraudulently, of common stock. There is also equity in the prayer that the directors shall be restrained from purchasing the shares in the Macon and Western Bailroad. But overruling the demurrer is one thing and granting the injunction is another. Judge Cole has, as we think, properly restrained the directors from purchasing the Macon and Western stock. From his refusal to appoint a Receiver, and his denial of all the other prayers of the bill as to the contract and receipt of the road, and as to the common stock, and the confining of his injunction to the transfer of the preferred stoelc, we must conclude that he felt the charges of fraud to be either completely repelled, or that the complainants had by their acquiescence estopped themselves. As we understand his judgment, he has restrained the transfer of the preferred stock, on the sole ground that the issue of such stock was illegal, and that such being the case, acquiescence or even consent by the stockholders could not cure the illegality.

2. In this we think there was error. There is nothing in the charter prohibiting either the issue of preferred stock, or the other part of the agreement which stipulates that a majority of the directors shall be the holders of a certain number of shares of this stock.. As to the latter point, the qualification of directors, nothing is more common in corporations than to pass a by-law fixing qualifications for directors, as that they shall be the holders of certain shares of stock.

This charter provides that the directors may make bylaws; and if they have power to make a by-law, we can see no reason why they have not power to contraet that a certain by-law shall exist. As we have said, there is nothing in this charter prohibiting the issue of preferred stock. It is contended, it is true, that the provision of the charter fixing each share at $100 for the amount paid in, prohibits the issue of preferred stock by implication. We do not feel called upon in this case to decide this question. We are inclined to the opinion that if there be no express prohibition against such issue in the charter, a corporation has power to issue such stock, keeping within the amount -of stock limited by the charter. It is, in fact, only one mode of borrowing money, and it would largely, and we think unwisely, cripple the efficiency of corporations to deny them this mode of of-fering security to those dealing with them. The weight of authority is in favor of such a power: Redfield on Railways 2d volume, 516; 49th Maine, 491; 15th Indiana, 395. Though we admit the question is a new one, and the doctrines upon the subject are not well established.

3. The record in this case shows that this contract, both for the issue of the stock, and as to the qualification of directors has been acted upon by the contractors. The contract was reported to the company and it was acquiesced in. The contractors, on the faith of it, have built the road. And the question is, not whether the directors had power to make it, but whether, after it has been made, after the company has, upon its part got the benefit of the contract, after the other parties have, upon the faith of it, spent their, money, and the company has acquiesced in the act of the directors, either the whole company, or a portion of the stockholders, can come forward and repudiate the contract?

Admitting the want of power in the officers to make the contract, can the company, or a portion of it, under the circumstances set forth, now repudiate it as:ultra vires ? Without doubt, there is an apparent conflict in the authorities upon this subject. It would seems from many cases, that an act ultra vires, by the officers of a corporation, is void, and that no amount of consent or acquiescence by the stockholders can estop them from setting up the illegality: 7 E. L. & E., 509; 35 E. L. & E., 8; 16 E. L. & E., 180; 22 Conn., 502; 21 Howard, 442; 12 E. L. & E., 224. On the other hand, it has often been held that the company or the stockholders may be estopped, like individuals, by consent, acquiescence, etc.: 30 E. L. E., 120 ; 35 Id, 37; 22 N. Y., 358; 17 Barb., 38 ; 5 El. & Bl., 248; Redfield on Railways, volume 1, 75; 14 Penn. St. R., 81; 23 Howard, 381; 4 John Chan., 370; 11 Eng. L. & E., 442; 24 Barb., 375; 9 Col., 45; Pierce on Railroad Law, 401; 19 Barb., 568; 6 Ohio, 119; 1 English Railway cases, 436; 2 Id, 187; 6 Allen, 52; 28 Georgia, 117. Upon a close examination, however, of the authorities, it will be found that this conflict is, for the most part, only apparent.

Every charter is a contract between the public and the corporators, and between the corporators themselves. An act of the officers (and a corporation can act in no other way) may violate the contract with the public. According to the authorities, such an act is an illegal contract, contrary to public policy, and void. But if the act only violate the contract between the corporators, it may or may not be void, accordingly as the corporators may have directed, assented to, or acquiesced in it. The former class of acts includes those which relate to enterprises or franchises not granted. The latter class includes such acts as violate those provisions of the charter which regulate the rights of the corporators with each other. It is apparent that there is a wide difference in the nature of things between these two classes of acts.

The officers of a corporation may do an act which is, under the charter, beyond the legitimate scope and province of the grant, as if a railroad company should undertake to build a cotton manufactory, or a bank to build a railroad. Such an act would be an attempt to exercise a franchise not granted to the corporation. There is strength in the argument that such an act is illegal, contrary to public policy, and however parties may have consented, they may ask the Courts to refuse to enforce contracts based upon or in furtherance of it. If by consent the stockholders could give validity to contracts based upon such acts, they could, in effect, grasp new franchises from the public at their pleasure. But acts of the officers of a corporation are often said to be ultra vires when they are wholly within the scope of the franchise granted in the charter, but they are beyond the authority conferred upon the officers.

Such acts, though directly contrary to the provisions of the charter, if they be authorized by the stockholders, or be acquiesced in, or confirmed, cannot be avoided after third persons have acted upon them. They are regulated by the rules which govern the relation of principal and agent to third persons: 4 John. Chan., 370; Pierce on Railroad Law, 401.

Applying these principles to the facts of this record, what is the result? The contract for the building of the one hundred and fifty miles of unfinished road was reported by the president to the stockholders’ meeting; these complainants were present. It is true the bill states that the president did not go into details, and that there were provisions of the contract, which, if the complainants had known, they would not have assented to. But it is admitted in the bill that they were distinctly informed as to the preferred stoelc. It is also stated in the bill, that the president did not pretend to state the details of the contract, or do more than give its general features. The whole thing was there for their inspection. It is not charged that there was any deception, much less that the contractors deceived them. If the complainants did not know the terms of the contract, it was simply because they did not care to know; five minutes reading of a paper, at the call of any stockholder, would have told them the exact truth. They saw fit not to read, to be satisfied with what was avowedly only a general statement of it to them by their own agent. Would it not be monstrous, after the contractors have done the work, to permit men, thus acting, to come forward and repudiate their own contract? The provision of the charter fixing the stock at $100 00 per share, and implying equality between the shareholders, is clearly a matter in which the public, as such, has no interest. It is simply a regulation looking to the internal management of the affairs of the company, to the rights of the stockholdei’s among each other. So, too, as to the qualification of directors. The company may make any rule on that subject they see fit. If so they may contract to do it, and if they receive the consideration they cannot say the contract was ultra vires.

These things are, even if they be provided for in the charter, mere contracts among the stockholders for the regulation of their rights as to each other; they are contracts, too, which any one stockholder has a right to insist upon, even against every other. But if there be a dealing with third persons, in which the stockholders acquiesce, or which they confirm, they cannot plead, when they are called on to comply with their contract, that it was ultra vires. We think, therefore, that as to the contract, even as the facts are stated in the bill, it is too late now for the complainants to set up ultra vires.

4. As so the question of fraud in the receipt of the road, we agree with Judge Cole, that the answer of Mr. Hazlehurst, with the printed annual reports attached, completely deny it. We think, too, that here, also, the acquiescence of the complainants for a year and their receipt of the profits, estops them. It was the contract that Mr. Hazlehurst should be the judge of the acceptance of the road, and the whole point of the charge is, fraud upon his part. If he was incompetent, if his judgment was bad, he was still the agent of the company. It is only the charge of fraud and complicity which gives vitality to this part of the bill. That, it seems to us, is completely denied. No matter if the road was incomplete. If, in the judgment of the president and engineer of the company, in good faith entertained, it was to the interest of the company to receive the road, and he has done it, and the company has, for a year, uncomplainingly acquiesced, they are estopped. They cannot now put the contractors where they were, and it would be a gross wrong to permit them at this late day to object. It is a well settled principle, that when work is to be received or not, according to the judgment of an engineer, his decision is final, unless there be fraud : 1 Redfield on Railways, 406, 416.

5. Upon the question of the right of the directors to purchase the stock of the Macon and Western Railroad, we abide by the decision made in the case of The Central Railroad vs. Stephen Collins, decided at December Term, 1869. We think the cases precisely parallel. If one railroad com-any may, at its option, buy the stock of another, it practically undertakes a new enterprise, not contemplated by its charter1 This it cannot do by any implication. The power so to do must be clear, and that, too, under the rule of construction that the charter is to be strictly construed as against the power. The power granted by the Act of 1860, pamphlet 193, to hold any kind of property, can only mean any kind of property necessary to carry out the purposes of the franchise, to-wit: the building and working a railroad from Macon to Brunswick. The purchase of this stock would be, and could be, only for the purpose of exercising a new franchise, to-wit: the running of a road from Macon to Atlanta. We do not care to go over the argument we have used in the case referred to. We simply say we see no reason to change the doctrine there, stated, and that there is nothing in the Act of 1856 or of 1860 broader than was in the charter of the Central Road. We take occasion to say that, in our judgment, the use of the State indorsed bonds for this purchase would be illegal. The purpose of the State was clearly not to aid the Macon and Brunswick Railroad in constructing the Macon and Western Railroad, but to complete and equip its own road.

6. Any stockholder has a right to insist that the bonds thus indorsed shall be, in good faith, used for the purpose intended by the State.

7. But we do not see how it is possible for a Chancellor, in this State, to enjoin a non-resident who has not been served with process by some officer of this State, from doing an act in the State of New York: Dearing vs. Bank of Charleston, 5 Georgia, 427; Adams vs. Lamar, 8 Georgia, 82; 1 Daniel Chancery Practice, 502. We greatly regret that this is the case. These bonds have been illegally used, and we should be very glad to lay our hands upon them. But the desire to do this cannot change the settled law of the case. Unless the parties can be served by some process, our Courts cannot control them by injunction. We do not say that there is no remedy for this wrong. These men hold property in Georgia, in this road, and any claim a citizen of Georgia has against them may, without doubt, follow that property. Clearly, also, the stockholders have a right to see to it, that the sinking fund provided for by the Act of 1865, indorsing the bonds, shall be set aside, as that Act requires. But there is no allegation in the bill that the company refuses to do this. The bill charges that it has not been done. Perhaps these very complainants have voted against doing so.

Courts will not, as a general rule, interfere between the stockholders and a corporation, until the methods in the power of the stockholders have been tried. It is not charged in this bill that any person has sought to have this fund set aside. Perhaps if a motion to that effect were made it would be done : Redfield on Railways, volume 2, 325; 4 E. L. & E., 113; 2 Hare, 461; 49 Penn., 310. We think this ought to be done. If none of the stockholders, will move it, we hope the State authorities will interfere and demand it, and if it is refused, we hope steps will be taken to compel it. These State indorsements are full of danger to the State, unless the law be very faithfully complied with.

Judgment reversed.