§ 2384. Right to sue. The fact that two corporations have directors or other officers in common does not of itself prevent one from maintaining an action against the other, and a judgment rendered in such an action is valid if free from fraudulent conduct on the part of the officers who procured the judgment.55

§ 2385. Who are "common" directors. This question, of course, does not ordinarily arise. In one case, however, the rule was attempted to be applied where boards of directors of two companies were appointed by a holding company of the majority of the stock of both companies, but it was held that such fact did not make applicable the rules relating to common directors, since "the fact that their boards may be, and undoubtedly are, appointed by this holding company, does not subject the government of the two companies to a common control. The complainant's argument implies that the directors of the holding company will appoint 'dummies' as directors of each of the two original companies, so that in fact the directors of the holding company will be the directors of both of the other companies. The proofs, however, utterly fail to establish any such situation.

56

§ 2386. Rights of corporations as dependent on for whom officer is really acting. In a case in North Dakota, it appeared that the treasurer of an elevator company, who was also cashier of a bank in which the elevator company deposited money, was authorized to draw checks for the latter company, and that he misappropriated bank funds, and, for the purpose of covering up the defalcation drew checks of the elevator company payable to the bank and charged them against the elevator company on the books of the bank. It was held that if he had no intention to transfer funds from one corporation to the other, but acted merely for the purpose of temporarily concealing his defalcation, the checks created no liability in favor of the bank against the elevator company.57

§ 2387. Who may attack. It has been stated in New York that "the right, however, to avoid a contract made by common directors

55 G. W. Jones Lumber Co. v. Wisarkana Lumber Co., 125 Ark. 65, 187 S. W. 1068.

56 Pierce v. Old Dominion Copper Mining & Smelting Co., 67 N. J. Eq. 399, 58 Atl. 319.

57 Emerado Farmers' Elevator Co.

v. Farmers' Bank of Emerado, 20 N. D. 270, 29 L. R. A. (N. S.) 567, 127 N. W. 522, also making different holdings according to possible inferences which might be drawn from the evidence.

is in the corporation, not in minority stockholders." 58 This statement, however, is too broad, and all that is meant apparently is that if the question is one relating to the internal management of the corporation and there is no bad faith or unfairness, or if the act has been ratified in good faith at a stockholders' meeting by a majority of the stockholders, a minority stockholder cannot interfere. So in another New York case it is said that while it is well settled that executory contracts entered into by corporations having common directors are voidable at the instance of either corporation, yet "this right is vested in the corporation, and not in the individual stockholder," unless fraud is shown; 59 but all that is meant by that decision, it is submitted, is that a minority stockholder, as such, cannot enjoin corporate contracts unless they are fraudulent, i. e., cannot interfere with the management of the corporation, where the acts are not ultra vires, except in case of fraud. It is held in New York that where the directors are all wrongdoers, a stockholder may sue to restrain the officers of the company, and to compel a restoration and an accounting, where the officers have given the use of all the corporate property to a rival of which they are also the officers, without the consent of the stockholders.60 However, if it be held that a majority of the stockholders may affirm dealings of corporations having common directors, then a minority stockholder cannot attack such a deal although the corporation might have power to do so, 61 provided there is no actual wrongdoing, such as a conversion of corporate assets.62

§ 2388.- Presumptions. It has been held that no presumption of illegality or unfairness arises merely from the fact of interlocking officers.63 On the other hand, it has been held that if officers of both contracting corporations are practically identical, there is a rebut table presumption that the contract is fraudulent.64 And it has been

58 Continental Ins. Co. v. New York & H. R. Co., 187 N. Y. 225, 79 N. E. 1026, aff'g 103 N. Y. App. Div. 282, 93 N. Y. Supp. 27.

59 Burden v. Burden, 159 N. Y. 287, 54 N. E. 17.

60 Boaz v. Sterlingworth Ry. Supply Co., 68 N. Y. App. Div. 1, 73 N. Y. Supp. 1039.

61 Hart v. Ogdensburg & L. C. R. Co., 89 Hun (N. Y.) 316, 35 N. Y. Supp. 566.

62 See § 2397, infra.

63 Reclamation Dist. No. 70 v. Birks, 159 Cal. 233, 113 Pac. 170.

"But such common directors owe the same fidelity to both corporations, and there is no presumption that they will deal unfairly with either." San Diego, O. T. & P. B. R. Co. v. Pacific Beach Co., 112 Cal. 53, 33 L. R. A. 788, 44 Pac. 333.

64 Barrie v. United Rys. Co. of St. Louis, 125 Mo. App. 96, 102 S. W. 1078.

held that if a person is an officer of two corporations involved in a transaction, "no man can serve two masters, and when he is in the service of two nominal masters whose interests conflict he is presumed to have acted for that one who is found to be the real master.

65

§ 2389. Burden of proof. The burden of showing a sale by one corporation to another, where they have some common directors, to be fair, is on the officers.66 "Upon principle, contracts between corporations having a common director should be regarded very much. as are contracts between individual directors and their corporations. Such contracts are not prohibited; nor are they prima facie void or fraudulent, but they are voidable, and it is a safe rule of conduct which imposes upon those who would sustain them the duty of showing clearly and satisfactorily that they are entirely fair and free from wrong. My conclusion is that the burden is cast upon the defendants to satisfy the court by evidence from those who were in the best position to know all the facts and circumstances, that the whole transaction was fair and absolutely free from oppression or wrong.'

67

§ 2390. Suggestion as to methods of procedure in case of common officers. The proper method, when there are interlocking officers who are more or less interested as stockholders in both corporations, if they are a majority of the respective boards of directors, is to appoint a disinterested committee from each board of directors to agree upon a contract and then to submit such agreement to the stockholders.68

§ 2391. Injunction against contemplated contracts. In any event, a single nonassenting stockholder cannot obtain an injunction against contemplated contracts between his own company and another company merely because of interlocking officers, especially before any definite contracts have been attempted to be made the fairness of the contemplated contracts being in no way questioned.69 Whether a single stockholder may have a contract between his cor

65 Brown v. Pennsylvania Canal Co., 229 Fed. 444, 453.

66 Geddes v. Anaconda Copper Min. Co., 222 Fed. 129, 133.

67 Geddes v. Anaconda Copper Min. Co., 197 Fed. 860, 864, 865.

68 Continental Ins. Co. v. New York

& H. R. Co., 187 N. Y. 225, 79 N. E. 1026.

69 Pierce v. Old Dominion Copper Mining & Smelting Co., 67 N. J. Eq. 399, 58 Atl. 319. See also Robotham v. Prudential Ins. Co. of America, 64 N. J. Eq. 673, 709, 53 Atl. 842.

poration and another corporation enjoined merely because of the presence of one or more common directors has been considered, but not fully decided, in New Jersey, and it was held that, in case of interlocking directors, "where all the directors of a corporation have a direct valuable interest in the action which they propose to take, in which interest their stockholders do not participate, these stockholders may compel them, before they will be allowed to carry out their scheme, to prove before the court that it is advantageous to the corporation"; and in that case Vice Chancellor Stevenson discusses at some length, without actually deciding, the question whether a minority stockholder may enjoin corporate acts because of common directors, and in the course of his remarks stated that "on the one hand it may be urged with great force that a minority stockholder has a right to repose upon impartial, unbiased action on the part of the directors, who are his trustees, and that he ought not to be obliged, where directors have been acting on both sides of a transaction, or are proposing so to act, to come into court with proofs of actual injury to himself or to the corporation. On the other hand, theoretical rules have to give way to the practical necessities of business. Business eventually is not extended, and great departments of human activity are not developed by means which are fraudulent. The use of such means in the end is suicidal. In these days the relations of corporations to each other are exceedingly complex. Common directors abound and common directors are better than 'dummies.' Whether a transaction between two corporations has been accomplished or remains executory, I incline strongly to believe that the safe rule in most cases in the end will be found to be that the presence of a director or directors on both sides of the transaction under investigation does not give the dissenting stockholder an arbitrary right to an injunction, but may give him a most ample right to subject the transaction to the security [scrutiny] of the court, and may cast upon the corporations or directors concerned the burden of disclosing and justifying the transaction." 70

§ 2392. Who may attack dealings between interested officers and corporation-In general. If the transaction is voidable, it may ordinarily be set aside at the option of the corporation, or of its stockholders in a proper case; and the motives of the corporation in repudiating such a contract are immaterial so far as the other party to

70 Robotham v. Prudential Ins. Co., 64 N. J. Eq. 673, 709, 53 Atl. 842, approved in Pierce v. Old Dominion

Mining & Smelting Co., 67 N. J. Eq. 399, 429, 58 Atl. 319.

the contract is concerned.71 Creditors or other third persons cannot attack the transaction on this ground.72 A purchase of the bonds of a corporation by its own directors cannot be attacked by purchasers of the corporate property whose conveyance recognizes the validity of the bond issue.73 The maker of a note cannot set up the defense, when sued by an indorsee, that the transfer by the payee was by a corporation to some of its officers and hence voidable.74 The president of a corporation, even though owning a majority of the stock, cannot escape liability under his personal contract by himself assigning it to the company and then accepting the assignment in behalf of the company.75

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§ 2393. - Other party to contract. If the contract between a corporation and one of its officers "proves to be a profitable one for the corporation, the corporation may hold the contracting officer to its performance. He cannot escape responsibility, though the corporation may."76 Directors and other officers of a corporation who deal with the corporation are presumed to know the extent of the powers of their co-officers with whom they deal, and hence they cannot rely upon any holding out by the company as creating apparent authority.77

§ 2394. Ratification or authorization of dealings with interested officer-General rule. The general rule is that a contract or other transaction between a corporation and its directors or other officers, is merely voidable at the option of the corporation, and not absolutely void.78 It follows that in those jurisdictions, where it so held, the transaction, if within the powers of the corporation, may be consented to, ratified or acquiesced in by the stockholders, or by the board of

72 Lackenbach v. Finn, 26 Cal. App. 482, 147 Pac. 471; Crymble v. Mulvaney, 21 Colo. 203, 40 Pac. 499; Marsters v. Umpqua Oil Co., 49 Ore. 374, 12 L. R. A. (N. S.) 825, 90 Pac. 151. 73 Medford v. Myrick, Tex. Civ. App., 147 S. W. 876.

74 Klein v. Funk, 82 Minn. 3, 84 N. W. 460.

75 Woodruff v. Shimer, 174 Fed. 584. 76 Union Pac. Ry. Co. v. Credit Mobilier, 135 Mass. 367, 376.

But where one authorized to sell property as agent for another sells it to a corporation wherein he is a stockholder and of which he is president, the sale may be set aside by the party for whom he is acting. Such party may, however, ratify the sale. Whitley v. James, 121 Ga. 521, 49 S. E. 600.

77 Baines v. Coos Bay Nav. Co., 45 Ore. 307, 77 Pac. 400. 78 See $2333, supra.