are themselves the persons, or subject to the control of the persons, against whom the suit is brought.13 A request to such directors that they institute suit would presumably be refused,11 and if it should be granted the litigation, being under the control of persons opposed to its success, would be necessarily unsatisfactory and inconclusive.15 The right to maintain a minority stockholder's suit may also rest upon any other state of facts which renders it reasonably certain that a suit by the corporation would be impossible or inexpedient.16 That the board of directors is subject to the control of the parties to be sued may be inferred from the fact that such parties are the holders of a great majority of the corporate stock.17 A suit on behalf of the corporation may be maintained by the minority stockholders even though the plaintiff stockholders themselves constitute or control the majority of the directors, if the defendants, on the other hand, control a majority of the stock. It is in such case clear that any suit instituted by the corporation would be suppressed by the defendants as soon as a new board of directors could be elected.18 E. 138, 51 L. R. A. N. S. 112, Am. & Eng. Ann. Cas., 1914 A. 777. 13. See cases cited in notes 14 and 15. 14. Mason v. Carrothers, 105 Me. 392, 409, 74 Atl. 1030, 1037; Knoop v. Bohmrich, 49 N. J. Eq. 82, 84, 23 Atl. 118, affirmed, sub nom. Bohmrich v. Knoop, 50 N. J. Eq. 485, 27 Atl. 636; Wills v. Nehalem Coal Company, 52 Or. 70, 87, 96 Pac. 528, 534, (citing Pomeroy's Equity Jurisprudence, (3rd. Ed.), Vol. 3, § 1095); Franey v. Warner, 96 Wis. 222, 227, 71 N. W. 81, 82-83. See, however, Brewer v. Boston Theatre, 104 Mass. 378, 388. 15. Brewer V. Boston Theatre, 104 Mass. 378, 387; Knoop v. Bohm rich, 49 N. J. Eq. 82, 85, 23 Atl. 118, affirmed, sub nom. Bohmrich V. Knoop, 50 N. J. Eq. 485, 27 Atl. 636; Brinckerhoff v. Bostwick, 88 N. Y. 52, 59; Averill v. Barber, 25 N. Y. St. Rep. 194, 6 Supp. 255, 2 Silv. 40, 53 Hun 636; Corning v. Barrett, 22 N. Y. Misc. 241, 48 Supp. 1013; Simon v. Weaver, 143 Wis. 330, 127 N. W. 950. 16. Wills v. Nehalem Coal Company, 52 Or. 70, 87-88, 96 Pac. 528, 534-535, quoting Pomeroy's Equity Jurisprudence, (3rd. Ed.), Vol. 3, $ 1095. 17. Wills v. Nehalem Coal Company, 52 Or. 70, 88, 96 Pac. 528, 535. 18. Mason v. Carrothers, 105 Me. A question on which there is some uncertainty is that of the necessity of showing a demand to bring suit, not only upon the board of directors, but upon the stockholders as well. The law seems to be that in the ordinary case, where the means of redress lies in the hands of the board of directors and the stockholders have no power or authority in relation thereto, a demand upon the stockholders would be useless and unnecessary and need not be alleged or proved. If the subject matter of the stockholders' complaint is for any reason within the immediate control of the vote of the stockholders the matter must be brought to their attention before suit is commenced unless, of course, it appears from the facts that such application could not be expected to receive fair consideration. 19 183. Stockholders' suits after receivership. After the company has gone into the hands of a receiver, the stockholders may, in case of the receiver's refusal to bring suit against the promoters, maintain a suit as stockholders, joining the receiver, the corporation and the guilty promoters as parties defendant.2 20 The stockholders must, in such case, prove that they have an actual interest in the prosecution of the suit, and would as stockholders be the gainers by a recovery, in other words, that 392, 409, 74 Atl. 1030, 1037. Cf. Brewer v. Boston Theatre, 104 Mass. 378, 389, et seq. 19. Brewer V. Boston Theatre, 104 Mass. 378, 387; Continental Securities Co. v. Belmont, 206 N. Y. 7, 16-19, 99 N. E. 138, 51 L. R. A. N. S. 112, Am. & Eng. Ann. Cas., 1914 A. 777, affirming, 150 N. Y. App. Div. 298, 134 Supp. 635. But see, however, Hawes v. Oakland, 104 U. S. 450, 461, 26 L. Ed. 827, and Moore v. Silver Valley Mining Co., 104 N. C. 534, 10 S. E. 679. See note to Continental Securities Co. v. Belmont, Am. & Eng. Ann. Cas., 1914 A. 777, 782. Also note to same case, 51 L. R. A. N. S. 112. 20. Porter v. Sabin, 149 U. S. 473, 13 Sup. Ct. 1008, 37 L. Ed. 815; Ackerman v. Halsey, 37 N. J. Eq. 356, 362, affirmed, sub nom. Halsey v. Ackerman, 38 N. J. Eq. 501; Brinckerhoff v. Bostwick, 88 N. Y. 52. For a suit after bankruptcy, see Meyer v. Page, 112 N. Y. App. Div. 625, 627, 98 Supp. 739. there will, in the case of a recovery against the promoters, be a surplus for distribution among the stockholders.21 If, after paying the debts, there remains in the hands of the receiver a surplus to be apportioned pro rata among the shareholders, an innocent stockholder may bring a suit for the cancellation of such shares as were unlawfully issued to the promoters, thereby increasing the moneys to be distributed among the bona fide stockholders.22 § 184. Suits by stockholders other than original subscribers. A minority stockholder suing in the Federal courts must allege that he was a shareholder at the time of the transaction of which he complains, or that his shares have devolved on 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 otherwise have cognizance.23 As the transactions of the promoters are generally consummated before the shares of the corporation have to any considerable extent been dealt in, this rule in practical effect confines minority stockholders' suits against promoters, to the original subscribers. This rule of the Federal courts, first announced in Hawes v. Oakland, 24 and subsequently embodied in Equity Rule No. 94, 21. Darragh v. Wetter Mfg. Co., 78 Fed. Rep. 7, 15-16, 23 C. C. A. 609, 49 U. S. App. 1; Corning v. Barrett, 22 N. Y. Misc. 241, 48 Supp. 1013; Bentinck v. Fenn, L. R. 12 App. Cas. 652, 664-665, 666-667, 671-672. 22. Weber v. Nichols, 75 N. J. Eq. 117, 75 Atl. 997. 23. Hawes v. Oakland, 104 U. S. 450, 452, et seq., 26 L. Ed. 827; Dimpfel v. Ohio & Miss. Ry. Co., 110 U. S. 209, 3 Sup. Ct. 573, 28 L. Ed. 121; Taylor v. Holmes, 127 U. S. 489, 32 L. Ed. 179, 8 Sup. Ct. 1192; Robinson V. West Virginia Loan For the purpose of determining the jurisdiction of the Federal courts, the amount involved in the minority stockholders' suit is to be taken as the amount claimed on behalf of the corporation and not the minority stockholders' interest therein. Hill v. Glasgow R. R. Co., 41 Fed. Rep. 610. Foster's Federal Practice, 16-J. 24. 104 U. S. 450, 26 L. Ed. 827. seems to be, not a general principle of law applicable to pleadings in all courts, but a rule adopted to save the Federal courts from the burden of cases not properly within their jurisdiction. Many of the state courts, accepting this view of the rule, hold that it has no application to a suit in the state courts.25 Some state courts, however, follow the rule of Hawes v. Oakland, in most cases without discussion.26 In Home Fire Ins. Co. v. Barber,27 however, the court stated that the rule, while designed in part to prevent collusive proceedings in fraud of the jurisdiction of the Federal courts, goes far beyond the requirements of such a purpose. "If that were the sole purpose of the rule, it should go no further than to prevent such suits where the vendor of the stock was a citizen of the same state as the corporation. If the vendor and purchaser were citizens of the same state, and the New York.-Pollitz v. Gould, 202 N. Y. 11, 14, 94 N. E. 1088, 38 L. R. A. N. S. 988, Am. & Eng. Ann. Cas., 1912 D. 1098; Continental Securities Co. v. Belmont, 206 N. Y. 7, 99 N. E. 138, 51 L. R. A. N. S. 112, Am. & Eng. Ann. Cas., 1914 A. 777; Continental Securities Co. v. Belmont, 83 Misc. 340, 355-356, 144 Supp. 801, 811, affirmed, 168 App. Div. 483, 154 Supp. 54. Oregon.-Wills v. Nehalem Coal Company, 52 Or. 70, 82, 88, 96 Pac. 528, 533, 535. Morawetz on Private Corporations, 88 269, 270. See also note to Pollitz v. Gould, Am. & Eng. Ann. Cas., 1912 D. 1102. 26. Colorado.-Boldenweck v. Bullis, 40 Colo. 253, 90 Pac. 634. Georgia.-Alexander v. Searcy, 81 Ga. 536, 8 S. E. 630, 12 Am. St. Rep. 337. Iowa.-Clark v. American Coal Co., 86 Iowa 436, 53 N. W. 291, 17 L. R. A. 557. New Mexico.-Rankin v. South West Brewery & Ice Co., 12 N. M. 54, 73 Pac. 614. North Carolina.-Moore v. Silver Valley Mining Co., 104 N. C. 534, 10 S. E. 679. See also note to Pollitz v. Gould, Am. & Eng. Ann. Cas., 1912 D. 1098, 1101. 27. 67 Neb. 644, 657-658, 93 N. vendor, an original stockholder, had never had the same citizenship as the corporation, no fraud on the jurisdiction of the court would be possible, and in such case, if recovery were proper and the purchaser's cause were meritorious, it would be highly unjust for the court to abrogate its jurisdiction. The rule has its foundation in a sound and wholesome principle of equity,— namely, that the rules worked out by chancellors in furtherance of right and justice shall not be used, because of their technical character, as rules, to reach inequitable or unjust results." It was held in Tompkins v. Sperry Jones, 28 an action brought against the promoters by the receivers of an insolvent corporation, that an allegation that some of " the present bond or stockholders were the original holders of those securities or that they received them from the defendants or from either of them" is necessary to enable the receiver to maintain his suit. This extension of the rule of Hawes v. Oakland seems to be supported neither by principle nor authority. It may be stated without fear of contradiction that even in the courts of the United States, or of those states which apply the rule of Hawes v. Oakland, it would in any case be sufficient for the plaintiff to show that he had subscribed for the stock at the time of the transaction complained of, though the share certificates were not issued to him until a later date. It has been said that the rule would not in any event prevent a suit by an original subscriber, although subscribing for his stock at a time subsequent to the transactions complained of, as the contractual rights of such subscriber with the corporation, and with every other subscriber, are, by relation, co-extensive with the legal existence of the corporation.29 § 185. Further of minority stockholders' suits. A suit against the promoters cannot be maintained for the W. 1024, 60 L. R. A. 927, 934, 108 28. 96 Md. 560, 54 Atl. 254. 29. See Wills v. Nehalem Coal Company, 52 Or. 70, 83-86, 96 Pac. 528, 534. |