poration,19 and the stockholder who sues as a representative of the corporation must show a right of action in the corporation.20 Thus, stockholders may sue directors or other officers for conversion or misappropriation of funds in a proper case.21 And, in a proper case, a stockholder may sue in a representative capacity to recover from directors, for the benefit of all, moneys improperly paid out by them to themselves or others, whether called dividends or additional salaries,22 and this also applies to unreasonable salaries.23 Equity has jurisdiction of an action by stockholders against directors or other officers for an account.24 A stockholder may sue directors for an accounting, although not strictly a creditor of the corporation, since their liability to account does not depend upon statutes giving such a remedy to creditors.25 Stockholders may sue for an accounting showing the amount of the losses caused by the mismanagement of officers, although a recovery at law could be had as to some of the transactions.26 A stockholder's suit asking 150 N. Y. App. Div. 298, 134 N. Y. Supp. 635, 75 N. Y. Misc. 234, 133 N. Y. Supp. 560. The court will have equitable jurisdiction of a suit against directors for an accounting brought by stockholders where the directors admit in their pleadings that moneys collected in behalf of the corporation were secured by them, make no denial of the receipt by them of the amount set out in the complaint, do not plead a stated account, nor deny that they are indebted to the corporation. Davis v. Hofer, 38 Ore. 150, 63 Pac. 56. But where the managing officers of a corporation are the guilty parties complained of, it has been held that a stockholder who owned nearly all of the stock could sue in his own name rather than in the name of the corporation, to cancel a deed. Hughes Manufacturing & Lumber Co. v. Culver, 126 Ark. 72, 189 S. W. 850. 19 McConnell v. Combination Mining & Milling Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194, aff'd 31 Mont. 563, 79 Pac. 248. Fraud in inducing purchase of stock is irrelevant in a stockholder's suit for the benefit of all stockholders. Sedgwick v. Seward Development Co., 144 N. Y. App. Div. 455, 129 N. Y. Supp. 209. 20 Rosenbaum V. Rice, 86 N. Y. App. Div. 617, 83 N. Y. Supp. 494. 21 Hayes v. Pierson, 65 N. J. Eq. 353, 58 Atl. 728, 45 Atl. 1091; Simon v. Weaver, 143 Wis. 330, 127 N. W.. 950. 22 Godley v. Crandall & Godley Co., 212 N. Y. 121, L. R. A. 1915 D 632, 105 N. E. 818, modifying 153 N. Y. App. Div. 697, 139 N. Y. Supp. 236. 23 Donald V. Manufacturers' Export Co., 142 Ala. 578, 38 So. 841; Bixler v. Summerfield, 195 Ill. 147, 62 N. E. 849. 24 Davis v. Hofer, 38 Ore. 150, 63 Pac. 56. 25 Cunningham v. Wechselberg, 105 Wis. 359, 81 N. W. 414. 26 McKinnon v. Morse, 177 Fed. 576. for an accounting and alleging a violation of fiduciary obligations is a suit in equity rather than an action at law.27 If the corporation is insolvent, however, stockholders cannot sue unless facts are stated to show that there will be something left after paying creditors.28 And where the right to sue is limited by statute to cases where the corporation is insolvent, a stockholder cannot sue in behalf of the corporation, where the corporate assets are sufficient to pay the creditors.29 So, if the directors refuse to sue, a stockholder cannot sue in equity unless he shows that the result of the action will be to promote justice and not inequitable results.30 It has been held that stockholders of a dissolved corporation cannot sue to set aside that part of an order procured by the receiver releasing directors from personal liability, where the order contained other provisions beneficial to the stockholders.31 § 2682. Request or demand on officers to sue. Stockholders cannot sue in their own behalf in equity, or in behalf of themselves and other stockholders, unless they show that they have unsuccessfully made every reasonable effort to have the corporation sue, or that any such effort would have been useless.32 When a request 27 Pollitz v. Wabash R. Co., 207 N. Y. 113, 100 N. E. 721. 28 Williams v. Neville, 98 Miss. 268, 53 So. 594. 29 Siegman v. Maloney, 63 N. J. Eq. 422, 51 Atl. 1003. 30 Siegman v. Maloney, 63 N. J. Eq. 422, 51 Atl. 1003, aff'd 65 N. J. Eq. 372, 54 Atl. 405, 65 N. J. Eq. 374, 54 Atl. 1125. 31 Craig v. James, 89 N. Y. App. Div. 541, 85 N. Y. Supp. 583, aff'd 181 N. Y. 538, 73 N. E. 1121. 32 United States. Monmouth Inv. Co. v. Means, 151 Fed. 159; Harrison v. Thomas, 112 Fed. 22. Alabama. King v. Livingston Mfg. Co., 192 Ala. 269, 68 So. 897. Illinois. Merle v. Beifeld, 194 Ill. App. 364. Indiana. Tevis v. Hammersmith, 31 Ind. App. 281, 66 N. E. 79, 912, aff'd 161 Ind. 74, 67 N. E. 672. Maine. Hersey v. Veazie, 24 Me. 9, 41 Am. Dec. 364. Massachusetts. Bartlett V. New York, N. H. & H. R. Co., 115 N. E. 976; Bartlett v. New York, N. H. & H. R. Co., 221 Mass. 530, 109 N. E. 452; Converse v. United Shoe Machinery Co., 209 Mass. 539, 95 N. E. 929. Mississippi. Beckett v. Planters' Compress & Bonded Warehouse Co., 107 Miss. 305, 65 So. 275. Missouri. Hingston v. Montgomery, 121 Mo. App. 451, 97 S. W. 202. Montana. McConnell v. Combination Mining & Milling Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194, aff'd 31 Mont. 563, 79 Pac. 248. New Jersey. Herrick v. Dempster, 73 N. J. Eq. 145, 75 Atl. 810; Siegman v. Maloney, 65 N. J. Eq. 372, 54 Atl. 405, aff'g 63 N. J. Eq. 422, 51 Atl. 1003. New York. Moran v. Vreeland, 81 Misc. 664, 143 N. Y. Supp. 522. Oregon. Wills V. Nehalem Coal Co., 52 Ore. 70, 96 Pac. 528. to sue will be deemed useless, as determined by the courts, is governed by the rules in regard thereto applicable to stockholders' suits in general; 33 and it is only necessary to state in this connection that no demand is necessary where it is clear that it would . be futile,34 as where the officers sought to be held liable are themselves in control of the corporation.35 If the corporation has been dissolved but it still, by statute, exists for the purpose of bringing actions, a stockholder cannot sue for a wrong to the corporation without showing a demand on the corporation to sue or a good excuse for not making a demand.36 If the corporation is in the hands of a receiver or other trustee, demand must first be made Pennsylvania. Kelly v. Thomas, 234 Pa. 419, 51 L. R. A. (N. S.) 122, South Carolina. Kickbusch v. Ruggles, 105 S. C. 525, 90 S. E. 163. Tennessee. Wallace V. Lincoln Texas. Caffall v. Bandera Tel. Co., Tex. Civ. App., 136 S. W. 105.. A contrary statement in Braswell v. Pamlico Insurance & Banking Co., 159 N. C. 628, 42 L. R. A. (N. S.) 101, 75 S. E. 813, was probably a mere oversight. Whether reasonable time was given directors to act, where letters were sent one week before filing a bill to the twenty-three directors, many of them living in other states, see Bartlett v. New York, N. H. & H. R. Co., 221 Mass. 530, 109 N. E. 452. Service of demand on secretary of corporation is sufficient. The Telegraph v. Lee, 125 Iowa 17, 98 N. W. 364. 33 Infra, chapter on Stockholders. 34 United States. Columbia Nat. Sand Dredging Co. v. Washed Bar Sand Dredging Co., 136 Fed. 710. Iowa. Schoening v. Schwenk, 112 Iowa 733, 84 N. W. 916. Massachusetts. Von Arnim v. Ameri can Tube Works, 188 Mass. 515, 74 N. E. 680. Michigan. Robinson v. De Luxe Motor Car Co. of New Jersey, 170 Mich. 163, 135 N. W. 897. New York. Jacobson v. Brooklyn Lumber Co., 184 N. Y. 152, 76 N. E. 1075; Hanna v. Lyon, 179 N. Y. 107, 71 N. E. 778; Polhemus v. Polhemus, 114 App. Div. 781, 100 N. Y. Supp. 263. 35 Forbes v. Wilson, 243 Fed. 264, 267. For a forcible statement of the rule, quite characteristic of the late Justice Gaynor of New York, see Polhemus v. Polhemus, 43 N. Y. Misc. 141, 88 N. Y. Supp. 273, in which he stated that the decision to the contrary in Fitchett v. Murphy, 46 N. Y. App. Div. 181, 61 N. Y. Supp. 182, was "so obviously contrary to law that it is deemed inadvertent, and not one that bench or bar should heed as authority." A stockholder may sue corporate officers for an accounting because of their mismanagement, where defendants hold a majority of the stock, since it would be useless to request the corporation to sue. Grout v. First Nat. Bank of Grand Junction, 48 Colo. 557, 21 Ann. Cas. 418, 111 Pac. 556. 36 Elmergreen v. Weimer, 138 Wis. 112, 119 N. W. 836. on him to sue.37 If the governing body is not the board of directors but is the grand lodge of a fraternal order, application for redress must first be made to such lodge.38 In the federal courts, this rule is found in the rules of court governing stockholders' actions.39 § 2683.Demand Demand on stockholders as a body to sue. It is not necessary, as a condition precedent, to show an appeal to the body of the stockholders, as a whole, to act, according to the better line of authorities.40 In Alabama, however, it is held that demand must not only be made upon the board of directors or other governing body but also upon the stockholders as a body where relief cannot be obtained from the board of directors.41 In any event, a stockholder need not first demand action by a meeting of stockholders where the alleged wrongdoer controls a majority of the stock.42 Where a statute makes directors personally liable to the corporation for unlawful payment of dividends, a succeeding board of directors is in duty bound to enforce such liability of prior directors; and if they refuse to do so, it has been held that a single stockholder may sue, in behalf of the corporation, one or more of the guilty directors, even though such stockholder had appealed from the decision of the board of directors not to sue to the stockholders as a body and was there defeated, since such action of the directors and majority stockholders does not pertain to the management of the internal affairs of the corporation.43 37 Planten v. National Nassau Bank of New York, 174 N. Y. App. Div. 254, 160 N. Y. Supp. 297. 38 Howze v. Harrison, 165 Ala. 150, 51 So. 614. 39 Field v. Western Life Indemnity Co., 166 Fed. 607, 610. Rule 27 of the Rules of Practice in Equity for the federal courts, formerly rule 94, provides that a stockholders' bill must "set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors or trustees, and, if necessary, of the shareholders, and the causes of his failure to obtain such action, or the reason for not making such effort." 40 Planten v. National Nassau Bank of New York, 174 N. Y. App. Div. 254, 160 N. Y. Supp. 297; Continental Securities Co. v. Belmont, 150 N. Y. App. Div. 298, 134 N. Y. Supp. 635, aff'd 206 N. Y. 7, 51 L. R. A. (N. S.) 112, Ann. Cas. 1914 A 777, 99 N. E. 138. 41 Hagwood v. Smith, 162 Ala. 512, 50 So. 374; Montgomery Light Co. v. Lahey, 121 Ala. 131, 25 So. 1006. 42 Forbes v. Wilson, 243 Fed. 264, 267. 43 Siegman v. Electric Vehicle Co., 140 Fed. 117, under New Jersey statute. § 2684. Status as stockholder as necessary. One who holds stock as collateral security has the same right as any other stockholder to sue in equity, on a proper showing, to hold the directors and other officers liable to the corporation for misappropriation of its property or funds or mismanagement. On the other hand, a stockholder cannot bring a stockholder's suit where he had ceased to be a stockholder at the time the action was commenced.45 But where one formerly a stockholder sues, but he had no right to sue because he had ceased to be a stockholder at the commencement of the action, but the action is brought on behalf of all the stockholders, the action should not be dismissed as to an intervening stockholder who on his own motion had been made a party plaintiff.46 Moreover, it is no defense to an action by some stockholders against directors to recover secret profits, that they had sold their stock before the action was commenced, where the injury was to them individually and not to the company, and where the sale was the result of the illegal acts of the directors complained of.47 A stockholder who has opposed the sale of all the corporate property, and who has not yet been paid the value of his stock as required by statute in such a case, may sue to recover misappropriations by corporate officers 48 § 2685. Right of subsequent stockholder to sue. There is some conflict as to whether a stockholder may sue to recover for mismanagement committed before he became a stockholder. In some states it is held that no such right exists,49 and also that a stock 44 Green v. Hedenberg, 159 Ill. 489, 50 Am. St. Rep. 178, 42 N. E. 851; Smith v. Smith, Sturgeon & Co., 125 Mich. 234, 84 N. W. 144. Contra, see Erny v. G. W. Schmidt Co., 197 Pa. 475, 47 Atl. 877. The pledgee of stock may hold directors liable to the amount of his claim in the stock pledged. Smith v. Smith, Sturgeon & Co., 125 Mich. 234, 84 N. W. 144, 7 Det. L. N. 477. 45 Hanna v. Lyon, 179 N. Y. 107, 71 N. E. 778, modifying 76 N. Y. App. Div. 224, 78 N. Y. Supp. 516; Rafferty v. Donnelly, 197 Pa. 423, 47 Atl. 202. One who was a stockholder at the time of the commission of the acts complained of, but who has ceased to be a stockholder at the time of the commencement of the action, cannot sue. Hanna v. Lyon, 179 N. Y. 107, 71 N. E. 778. 46 Hanna v. Lyon, 179 N. Y. 107, 71 N. E. 778. 47 Porter v. Healy, 244 Pa. 427, 91 Atl. 428. 48 Cole v. Wells, 224 Mass. 504, 113 N. E. 189. 49 Matthews v. Headley Chocolate Co., 130 Md. 523, 100 Atl. 645, reviewing authorities at some length; Home Fire Ins. Co. v. Barber, 67 Neb. 644, 60 L. R. A. 927, 108 Am. St. Rep. 716, 93 N. W. 1024. |