unless such dealings are otherwise void as against public policy.72 Some decisions, however, seem to hold that contracts where the interested officer represents both himself and the corporation as the adverse parties to the contract, including contracts between all or a majority of the directors as representing the corporation on one side and themselves as individuals on the other side, are void,73 although some of the decisions which apparently so hold are doubtlessly merely illustrations of a loose use of the word "void," without intending to mean "absolutely void." 74 In South Dakota it is held that if a resolution is passed in which one of the directors is interested, and it is passed by his vote or by the vote of a director under his controlling influence, without which vote or votes there would not have been a majority in favor of said resolution, it is "absolutely void" as against the corporation.75 §2334. Transaction as subject to careful scrutiny by courts. Merely because of the fiduciary relationship existing between a corporation and its officers, a court, when the company is seeking to set aside or resist the enforcement of a contract between it and one or more of its officers, or in which one or more of its officers are interested adversely to the corporation, will, for the protection of the corporation and its stockholders, i. e., the cestui que trust, carefully Co., 72 Miss. 338, 28 L. R. A. 220, 48 In North Dakota, it is held that, in the absence of affirmative evidence of authority from the board of directors to make the deed, "a deed made by the cashier of a bank to himself as an individual is presumptively void and of no effect." Northwestern Fire & Marine Ins. Co. v. Lough, 13 N. D. 601, 102 N. W. 160. This, however, involves a different proposition, and in addition it is doubtful whether the word "void" is used as meaning anything more than "voidable." 74 See, for instance, Haines Mercantile Co. v. Highland Mines Co., 49 Ore. 71, 88 Pac. 865, where statement that contract or transaction is "void" was probably inadvertent. 75 Crocker v. Cumberland Mining & Milling Co., 31 S. D. 137, 139 N. W. 783. look into and investigate the contract to see that the corporation has not been imposed upon by one or more of its officers. In other words, even if the contract is not voidable merely because of the adverse interests of one or more corporate officers, it will not be sustained, if attacked, unless the fairness of the contract and the good faith of the interested officer or officers is clearly evident. In a leading case in the Supreme Court of the United States, the true rule is stated as follows: "That a director [and the rule applies to other managing officers] of a joint stock corporation occupies one of those fiduciary relations where his dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and in others."'76 The decisions all support this view.77 As said by a federal court, such contracts "should be scanned, if not with suspicion, at least with the most scrupulous care. The validity of such a contract must therefore depend upon the nature and terms of the contract itself and the circumstances under which it is made. The motives of the parties are not necessarily material, but the effect of the provisions of the contract must be especially regarded, and if they are pernicious and tend to work a fraud on the rights of the corporation and stockholders, in such case the directors must be regarded as having no authority to enter into it." 78 The rule is that even if a director or other corporate officer may deal with the corporation or with cor 76 Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 588, 23 L. Ed. 328. 77 United States. In re Castle Braid Co., 145 Fed. 224; Union Trust Co. of Maryland v. Carter, 139 Fed. 717. Alabama. Mobile Land Improvement Co. v. Gass, 142 Ala. 520, 39 So. 229. California. Dundon V. McDonald 146 Cal. 585, 80 Pac. 1034; Snediker v. Ayers, 146 Cal. 407, 80 Pac. 511. Colorado. Mosher v. Sinnott, 20 Colo. App. 454, 79 Pac. 742; Mackey v. Burns, 16 Colo. App. 6, 64 Pac. 485. Kentucky. Oregon Gold Min. Co. v. Schmidt, 22. Ky. L. Rep. 1330, 60 S. W. 530. New Jersey. Hollins v. American Union Elec. Co., 66 N. J. Eq. 457, 60 Tennessee. Rawlings v. New Memphis Gaslight Co., 105 Tenn. 268, 80 Am. St. Rep. 880, 60 S. W. 206. Courts of equity subject the transactions of corporate officers with their corporations to most searching scrutiny, and place the burden upon them to show that they hold bona fide, honest and just claims against the corporation. Schneider v. Johnson, 161 Mo. App. 375, 143 S. W. 78. 78 Hubbard v. New York, N. E. & W. Inv. Co., 14 Fed. 675, 676. porate property, under some conditions, as for instance where he contracts with his corporation which is represented wholly by disinterested officers (according to the weight of authority), yet in all cases the liberty must "be exercised subject to the rules which belong to his peculiar position," and the court will look at the acts of the officer "with far greater scrutiny" than as if he sustained no relation to the company, and is justified in setting aside the transaction "upon much slighter ground." 79 If a director is a sole director, or one of a small number vested with certain powers, it is said that the obligation to be candid and act in good faith in dealing with the corporation is stronger than in case where there are several directors, "and his acts subject to more severe scrutiny, and their validity determined by more rigid principles of morality, and freedom from motives of selfishness.'' 80 § 2335. - Necessity that transaction be fair and not a breach of trust. Now, having stated that the transaction will be closely scrutinized, the next proposition is that the corporation may always have the transaction set aside, or defend against its enforcement, if it is unfair or entered into in bad faith by the officer adversely interested. Regardless of whether an interested officer contracts or deals with himself as the representative of the corporation, or with other officers who represent the corporation, in no case can the transaction be upheld, where attacked by the corporation or, in a proper case, by its stockholders, unless the transaction is shown to be fair, above board, and entered into in good faith,81 provided the transaction has not been expressly or impliedly ratified 82 and the right to attack the trans 79 Hallam v. Indianola Hotel Co., 56 Iowa 178, 9 N. W. 111. 80 Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 590, 23 L. Ed. 328. 81 United States. Burnes v. Burnes, 137 Fed. 781, aff'g 132 Fed. 485. Georgia. Fricker v. Americus Manufacturing & Improvement Co., 124 Ga. 165, 52 S. E. 65. Kansas. El Capitan Land & Cattle Co. v. Boston-Kansas City Cattle Loan Co., 65 Kan. 359, 69 Pac. 332. Massachusetts. Elliott v. Baker, 194 Mass. 518, 80 N. E. 450. Minnesota. Savage Farmers' Warehouse Co., 98 Minn. New Jersey. Robotham v. Prudential Ins. Co., 64 N. J. Eq. 673, 53 Atl. 842. Directors may become creditors of the corporation, but the contracts by which they become creditors are subject to close scrutiny and will be enforced only when fair and equitable. Coombs v. Barker, 31 Mont. 526, 79 Pac. 1. 82 See §§ 2394-2400, infra. action has not been lost by laches.83 Stated in another way, all the courts agree, when a director or other officer is dealing with a corporation, even where the latter is represented by the other directors or officers, that such officer cannot deal unfairly, or act in bad faith towards the corporation. If the transaction is not open, fair and free from all suspicion of fraud, the corporation is entitled to have it set aside, or to prevent its enforcement,84 and, in determining whether there has been unfair dealing, the court will subject the transaction to the most rigid scrutiny, as already stated.85 But it may be asked when a transaction may be considered "unfair" or entered into in "bad faith"; and the answer is that whether, in a particular case, the courts will enforce or set aside a contract wherein a director or other officer is interested adversely to the corporation, on the ground it is unfair or in bad faith, depends in a great measure upon the facts of the particular case, since no inflexible rule has been established.86 However, it is self-evident that there need be no actual showing of fraud such as would be necessary to avoid the contract if entered into with a stranger. The unfairness relied on often consists in the opposing side in which the officer is interested having acquired the best of the deal in a financial way. Thus, a general manager cannot purchase all the corporate property, or take it over in payment of his debts and in consideration of his assuming the other corporate debts, at a grossly inadequate price, as against the rights of a minority stockholder.87 So where a director acquired timber land from his 83 See §§ 2041, 2402, infra. 84 United States. Thomas v. Brownville, Ft. K. & P. R. Co., 109 U. S. 522, 27 L. Ed. 1018, rev 'g 2 Fed. 877; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328; Koehler v. Black River Falls Iron Co., 2 Black 715, 17 L. Ed. 339; Howland v. Corn, 232 Fed. 35; Meeker v. Winthrop Iron' Co., 17 Fed. 48; Hubbard v. New York, N. E. & W. Inv. Co., 14 Fed. 675. California. Woodroof v. Howes, 88 Cal. 184, 26 Pac. 111; Graves v. Mono Lake Hydraulic Min. Co., 81 Cal. 303, 22 Pac. 665. Illinois. Higgins v. Lansingh, 154 Ill. 301, 40 N. E. 362; Charter Gas Engine Co. v. Charter, 47 Ill. App. 36. Iowa. Hallam v. Indianola Hotel Co., 56 Iowa 178, 9 N. W. 111. Kentucky. Ecker v. Kentucky Refining Co., 144 Ky. 264, 138 S. W. 264. Louisiana. Crescent City Brewing Co. v. Flanner, 44 La. Ann. 22, 10 So. 384. Maryland. Mish v. Main, 81 Md. 36, 31 Atl. 799. Minnesota. Jones v. Morrison, 31 Minn. 140, 16 N. W. 854. New Jersey. Wilkinson v. Bauerle, 41 N. J. Eq. 635, 7 Atl. 514. Pennsylvania. Schmid v. Lancaster Ave. Theater Co., 244 Pa. 373, 91 Atl. 363. 85 See § 2334, supra. 86 City Nat. Bank v. Merchants' & Planters' Nat. Bank (Tex. Civ. App.), 105 S. W. 338. 87 Ekberg v. Swedish-American Pub. Co., 114 Minn. 196, 130 N. W. 1029, corporation for a very small part of its real value, although under an option to the company to repurchase it within a certain time, the corporation may have the transfer set aside.88 But, even in a case of inadequacy of consideration, if the corporation was represented by disinterested officers and the officer adversely interested informs them. of his interest and fully discloses all of the facts pertinent to the transaction, within his knowledge, it would seem that the courts would be loath to relieve the corporation even though it had received the worst of the deal. On this theory that officers must deal fairly with the corporation, directors have no right to take a note secured by mortgage, as a creditor of the company, when at the same time they are indebted to the company in a larger sum.89 Three directors cannot pass a valid resolution acknowledging indebtedness to two of them and instructing the secretary to execute corporate notes therefor, where the basis of the alleged debt was a loan to the corporation which was to be repaid only out of the net proceeds from the sale of ore, and no such proceeds had been received, cince such a ratification would be practically making a new contract which would be unfair.90 In any event, if there is actual fraud, such as false representations on the part of the officer who is adversely interested, the transaction may be set aside by the corporation or it may defend its enforcement on that ground.91 Thus, if the corporation has relied upon an officer to aid it in conducting its business, as where a president of a bank has been in the habit of helping a bank to make loans, with knowledge that it relied on his advice, it may rescind a sale by him to it of negotiable paper where he misrepresented the credit of the names ing that the purchase was necessary to protect the lateral rights of the company in its mine, and that, if they did not consent, the purchase would be made nevertheless; and the purchase was afterwards authorized at a directors' meeting attended by such officers, the secretary and another resident director, the president not voting, it was held that the purchase was a fraud upon the corporation, and should be set aside, although the two directors other than the president and treasurer were innocent of actual fraud. Gerry v. Bismarck Bank, 19 Mont. 191, 47 Pac. 810. |