1. A shareholder in the Contra Costa Waterworks Company brought
his bill in equity against the Cty of Oakland, the company, and its
directors, alleging that the company was furnishing the city with
water, free of charge, beyond what the law required it to do, and
that the directors, contrary to his request, continued to do so, to
the great injury of himself, the other shareholders, and the
company.
Held that in such a case there mast be shown 1,
some action or threatened action of the directors or trustees which
is beyond the authority conferred by the charter, or the law under
which the company was organized, or 2, such a fraudulent
transaction, completed or threatened, by them, either among
themselves or with some other party or with shareholders, as will
result in serious injury to the company or the other shareholders
or 3, that the directors, or a majority of them, are acting for
their own interests, in a manner destructive of the company, or of
the rights of the other shareholders, or 4, that the majority of
shareholders are oppressively and illegally pursuing, in the name
of the company, a course in violation of the rights of the other
shareholders, which can only be restrained by a court of equity; 5,
it must also be made to appear that the complainant made an earnest
effort to obtain redress at the hands of the directors and
shareholders of the corporation, and that the ownership of the
stock was vested in him at the time of the transactions of which he
complains, or was thereafter transferred to him by operation of
law.
2. It is the duty of the circuit court to dismiss the suit if
the parties thereto have been improperly or collusively made or
joined for the purpose of creating a case of which that court would
have cognizance.
The facts are stated in the opinion of the Court.
MR. JUSTICE MILLER delivered the opinion of the Court.
This is an appeal from a decree in chancery dismissing the
complainant's bill, wherein he, a citizen of New York, alleges that
he is a stockholder in the Contra Costa Waterworks Company, a
California corporation, and that he files it on behalf of himself
and all other stockholders who may choose to come in and contribute
to the costs and expenses of the suit.
The defendants are the City of Oakland, the Contra Costa
Waterworks Company, and Anthony Chabot, Henry Pierce,
Page 104 U. S. 451
Andrew J. Pope, Charles Holbrook, and John W. Coleman, trustees
and directors of the company.
The foundation of the complaint is that the Cty of Oakland
claims at the hands of the company water, without compensation, for
all municipal purposes whatever, including watering the streets,
public squares and parks, flushing sewers, and the like, whereas it
is only entitled to receive water free of charge in cases of fire
or other great necessity; that the company comply with this demand,
to the great loss and injury of the company, to the diminution of
the dividends which should come to him and other stockholders, and
to the decrease in the value of their stock. The allegation of his
attempt to get the directors to correct this evil will be given in
the language of the bill.
He says that
"On the tenth day of July, 1878, he applied to the president and
board of directors or trustees of said water company, and requested
them to desist from their illegal and improper practices aforesaid,
and to limit the supply of water free of charge to said city to
cases of fire or other great necessity, and that said board should
take immediate proceedings to prevent said city from taking water
from the works of said company for any other purpose without
compensation, but said board of directors and trustees have wholly
declined to take any proceedings whatever in the premises, and
threaten to go on and furnish water to the extent of said company's
means to said Cty of Oakland free of charge for all municipal
purposes, as has heretofore been done, and in cases other than
cases of fire or other great necessity, except as for family uses
hereinbefore referred to, and your orator avers that by reason of
the premises said water company and your orator and the other
stockholders thereof have suffered, and will, by a continuance of
said acts, hereafter suffer, great loss and damage."
To this bill the water-works company and the directors failed to
make answer; and the Cty of Oakland filed a demurrer, which was
sustained by the court and the bill dismissed. The complainant
appealed.
Two groups of demurrer were set out and relied on in the court
below, and are urged upon us on this appeal. They are:
Page 104 U. S. 452
1. That appellant has shown no capacity in himself to maintain
this suit, the injury, if any exists, being to the interests of the
corporation, and the right to sue belonging solely to that
body.
2. That by a sound construction of the law under which the
company is organized, the City of Oakland is entitled to receive,
free of compensation, all the water which the bill charges it with
so using.
The first of these causes of demurrer presents a matter of very
great interest, and of growing importance in the courts of the
United States.
Since the decision of this Court in
Dodge v.
Woolsey, 18 How. 331, the principles of which have
received more than once the approval of this Court, the frequency
with which the most ordinary and usual chancery remedies are sought
in the federal courts by a single stockholder of a corporation who
possesses the requisite citizenship, in cases where the corporation
whose rights are to be enforced cannot sue in those courts, seems
to justify a consideration of the grounds on which that case was
decided, and of the just limitations of the exercise of those
principles.
This practice has grown until the corporations created by the
laws of the states bring a large part of their controversies with
their neighbors and fellow citizens into the courts of the United
States for adjudication, instead of resorting to the state courts,
which are their natural, their lawful, and their appropriate forum.
It is not difficult to see how this has come to pass. A corporation
having such a controversy, which it is foreseen must end in
litigation, and preferring for any reason whatever that this
litigation shall take place in a federal court, in which it can
neither sue its real antagonist nor be sued by it, has recourse to
a holder of one of its shares, who is a citizen of another state.
This stockholder is called into consultation, and is told that his
corporation has rights which the directors refuse to enforce or to
protect. He instantly demands of them to do their duty in this
regard, which of course they fail or refuse to do, and thereupon he
discovers that he has two causes of action entitling him to
equitable relief in a court of chancery -- namely, one against his
own company, of which he is a
Page 104 U. S. 453
corporator, for refusing to do what he has requested them to do,
and the other against the party which contests the matter in
controversy with that corporation. These two causes of action he
combines in an equity suit in the circuit court of the United
States because he is a citizen of a different state, though the
real parties to the controversy could have no standing in that
court. If no nonresident stockholder exists, a transfer of a few
shares is made to some citizen of another state, who then brings
the suit. The real defendant in this action may be quite as willing
to have the case tried in the federal court as the corporation and
its stockholder. If so, he makes no objection, and the case
proceeds to a hearing. Or he may file his answer denying the
special grounds set up in the bill as a reason for the
stockholder's interference, at the same time that he answers to the
merits. In either event, the whole case is prepared for hearing on
the merits, the right of the stockholder to a standing in equity
receives but little attention, and the overburdened courts of the
United States have this additional important litigation imposed
upon them by a simulated and conventional arrangement, unauthorized
by the facts of the case or by the sound principles of equity
jurisdiction.
That the vast and increasing proportion of the active business
of modern life which is done by corporations should call into
exercise the beneficent powers and flexible methods of courts of
equity is neither to be wondered at nor regretted, and this is
especially true of controversies growing out of the relations
between the stockholder and the corporation of which he is a
member. The exercise of this power in protecting the stockholder
against the frauds of the governing body of directors or trustees,
and in preventing their exercise, in the name of the corporation,
of powers which are outside of their charters or articles of
association has been frequent, and is most beneficial and is
undisputed. These are real contests, however, between the
stockholder and the corporation of which he is a member.
The case before us goes beyond this.
This corporation, like others, is created a body politic and
corporate, that it may in its corporate name transact all the
Page 104 U. S. 454
business which its charter or other organic act authorizes it to
do.
Such corporations may be common carriers, bankers, insurers,
merchants, and may make contracts, commit torts, and incur
liabilities, and may sue or be sued in their corporate name in
regard to all of these transactions. The parties who deal with them
understand this, and that they are dealing with a body which has
these rights and is subject to these obligations, and they do not
deal with or count upon a liability to the stockholder whom they do
not know and with whom they have no privity of contract or other
relation.
The principle involved in the case of
Dodge v. Woolsey
permits the stockholder in one of these corporations to step in
between that corporation and the party with whom it has been
dealing and institute and control a suit in which the rights
involved are those of the corporation, and the controversy is one
really between that corporation and the other party, each being
entirely capable of asserting its own rights.
This is a very different affair from a controversy between the
shareholder of a corporation and that corporation itself, or its
managing directors or trustees, or the other shareholders, who may
be violating his rights or destroying the property in which he has
an interest. Into such a contest the outsider, dealing with the
corporation through its managing agents in a matter within their
authority, cannot be dragged except where it is necessary to
prevent an absolute failure of justice in cases which have been
recognized as exceptional in their character and calling for the
extraordinary powers of a court of equity. It is therefore always a
question of equitable jurisprudence, and as such has, within the
last forty years, received the repeated consideration of the
highest courts of England and of this country.
The earliest English case in which this subject received any
very careful consideration is
Foss v. Harbottle, 2 Hare
461, where Vice-Chancellor Wigram gave a very full and able
opinion. The case was decided in 1843 on a demurrer to the bill,
which was brought by Foss and Turton, two shareholders in an
incorporation called the Victoria Park Company, on behalf of
themselves and all other stockholders except those who
Page 104 U. S. 455
were made defendants against the directors and one shareholder
not a director and against the solicitor and architect of the
company. The bill charged that the defendants concerted and
effected various fraudulent and illegal transactions whereby the
property of the company was misapplied, aliened, and wasted; that
there had ceased to be a sufficient number of qualified directors
to constitute a board, and that the company had no clerk or office.
It prayed for the appointment of a receiver and for a decree
against the defendants to make good the loss. After showing that
the case was one in which the right of action was in the company,
the Vice-Chancellor said:
"In law, the corporation and the aggregate members of the
corporation are not the same thing for purposes like this, and the
only question can be whether the facts alleged in this case justify
a departure from the rule which
prima facie would require
that the corporation should sue in its own name and in its
corporate character or in the name of someone whom the law has
appointed to be its representative."
Again, after pointing out that cases may arise where the claims
of justice would be found superior to the technical rules
respecting the mode in which corporations are required to sue, he
adds:
"But on the other hand, it must not be without reasons of a very
urgent character that the established rules of law and practice are
to be departed from -- rules which, though in a sense technical,
are founded on the general principles of justice and convenience,
and the question is whether a case is stated in this bill entitling
the plaintiffs to sue in their private characters."
He then, in an elaborate argument, holds that the bill is
fatally defective because it does not aver that there is no acting
or
de facto board of directors who might have ordered the
bringing of this suit, and secondly that it was the duty of the
plaintiffs -- the two shareholders who complain of what had been
done -- to have called a meeting of the shareholders or attended at
some regular annual meeting and obtained the action of a majority
on the matters in issue. The majority, he says, may have been
content with what was done and may have ratified the action of the
board, in which case the whole body would have been bound by
it.
Page 104 U. S. 456
The demurrer was sustained and the bill dismissed.
In the subsequent case of
Mozley v. Alston, 1 Ph. 790,
decided in 1847, Lord Chancellor Lyndhurst says that
"the observations of the Vice-Chancellor in
Foss v.
Harbottle correctly represent what is the principle and
practice of the court in reference to suits of this
description."
These cases have been referred to again and again in the English
courts as leading cases on the subject to which they relate, and
always with approval.
In
Gray v. Lewis, decided in 1873, Sir W. M. James,
L.J., said:
"I am of opinion that the only person, if you may call it a
person, having a right to complain was the incorporated society
called Charles Lafitte & Co. In its corporate character, it was
liable to be sued and was entitled to sue, and if the company sued
in its corporate character, the defendant might allege a release or
a compromise by the company in its corporate character -- a defense
which would not be open in a suit where a plaintiff is suing on
behalf of himself and other shareholders. I think it is of the
utmost importance to maintain the rule laid down in
Mozley v.
Alson and
Foss v. Harbottle, to which, as I
understand, the only exception is where the corporate body has got
into the hands of directors, and of the majority, which directors
and majority are using their power for the purpose of doing
something fraudulent against the minority, who are overpowered by
them, as in
Atwood v. Merryweather, where Vice-Chancellor
Wood sustained a bill by a shareholder on behalf of himself and
others, and there it was after an attempt had been made to obtain
proper authority from the corporate body itself in a public meeting
assembled."
Law Rep. 8 Ch.App. 1035.
But perhaps the best assertion of the rule and of the exceptions
to it are found in the opinion of the court by the same learned
justice in
MacDougall v. Gardiner, in 1875, 1 Ch.D. 13. "I
am of opinion," he says,
"that this demurrer ought to be allowed. I think it is of the
utmost importance in all these controversies that the rule which is
well known in this court as the rule in
Mozley v. Alston,
and
Lord v. Copper Miners' Company, and
Foss v.
Harbottle, should always be adhered to -- that is to say that
nothing connected with internal disputes between
Page 104 U. S. 457
shareholders is to be made the subject of a bill by some one
shareholder on behalf of himself and others unless there be
something illegal, oppressive, or fraudulent; unless there is
something
ultra vires on the part of the company
qua company or on the part of the majority of the company,
so that they are not fit persons to determine it, but that every
litigation must be in the name of the company if the company really
desire it. Because there may be a great many wrongs committed in a
company -- there may be claims against directors, there may be
claims against officers, there may be claims against debtors, there
may be a variety of things which a company may well be entitled to
complain of but which, as a matter of good sense, they do not think
it right to make the subject of litigation, and it is the company
as a company which has to determine whether it will make anything
that is a wrong to the company a subject matter of litigation or
whether it will take steps to prevent the wrong from being
done."
The cases in the English courts are numerous, but the foregoing
citations give the spirit of them correctly.
In this country, the case outside of the federal courts are not
numerous, and while they admit the right of a stockholder to sue in
cases where the corporation is the proper party to bring the suit,
they limit this right to cases where the directors are guilty of a
fraud or a breach of trust or are proceeding
ultra vires.
Marsh v. Eastern Railroad Co., 40 N.H. 548;
Peabody v.
Flint, 6 Allen (Mass.) 52. In
Brewer v. Boston
Theatre, 104 Mass. 378, the general doctrine and its
limitations are very well stated.
See also Hersey v.
Veazie, 24 Me. 9, and
Samuel v. Holladay, 1 Wollw.
400.
The case of
Dodge v. Woolsey, decided in this Court in
1855, is, however, the leading case on the subject in this
country.
And we do not believe, notwithstanding some expressions in the
opinion, that it is justly chargeable with the abuses we have
mentioned. It was manifestly well considered, and the opinion is
unusually long, discussing the point now under consideration with a
full reference to the decisions then made in the courts of England.
The suit -- a bill in chancery -- was brought in the Circuit Court
for the District of Ohio by Woolsey, a stockholder of the
Commercial Bank of Cleveland, and a citizen
Page 104 U. S. 458
of Connecticut, against that bank, its managing directors, and
Dodge, tax collector of the county in which the bank was situated,
citizens of Ohio. The bill alleged that Dodge had levied upon
property of the bank to make collection of a tax, which, by the
Constitution of the state of Ohio, the bank was bound to pay; that
in that respect the Constitution, then recently adopted, impaired
the obligation of the contract of the state with the bank,
contained in its charter. It appeared in the case that Woolsey had,
by letter directed to the board of directors, requested them to
institute proceedings to prevent the collection of this tax, but
the board, by a resolution, declined to take any such action, while
expressing their opinion that the tax was illegal. In the opinion
of the Court, reciting the circumstances which justified its
interposition at the suit of the stockholder, the allegation of the
bill is adverted to that if the taxes are enforced, it will annul
the contract with the state concerning taxation, and that the tax
is so onerous upon the bank that it will compel a suspension and
final cessation of its business. The following extract from Angell
& Ames on Corporations is cited with approval:
"Though the result of the authorities clearly is that in a
corporation, when acting within the scope of and in obedience to
the provisions of its constitution, the will of the majority,
clearly expressed, must govern, yet beyond the limits of the act of
incorporation, the will of the majority cannot make the act valid,
and the power of a court of equity may be put in motion at the
instance of a single shareholder if he can show that the
corporation are employing their statutory powers for the
accomplishment of purposes not within the scope of their
institution. Yet it is to be observed that there is an important
distinction between this class of cases and those in which there is
no breach of trust, but only error and misapprehension or simple
negligence on the part of the directors."
And the Court adds: "It is obvious from this rule that the
circumstances of each case must determine the jurisdiction of a
court of equity to give the relief sought."
A very large part of the opinion is devoted to the consideration
of the high function of this Court in construing the Constitution
of the United States, and it is impossible not to see the influence
on the mind of the writer of that opinion of the
Page 104 U. S. 459
fact that the only question on the merits of the case was one
which peculiarly belonged to the federal judiciary, and especially
to this Court to decide -- namely whether the Constitution of the
state of Ohio violated the obligation of the contract concerning
taxation found in the charter of the bank.
As the law then stood, there was no means by which the bank,
being a citizen of the same state with Dodge, the tax collector,
could bring into a court of the United States the right which it
asserted under the Constitution, to be relieved of the tax in
question, except by writ of error to a state court from the Supreme
Court of the United States.
That difficulty no longer exists, for by the Act of March 3,
1875, c. 137, 18 Stat., pt. 3, p. 470, all suits arising under the
Constitution or laws of the United States may be brought originally
in the circuit courts of the United States without regard to the
citizenship of the parties. Under this statute, if it had then
existed, the bank in
Dodge v. Woolsey could undoubtedly
have brought suit to restrain the collection of the tax in its own
name, without resort to one of its shareholders for that
purpose.
And this same statute, while enlarging the jurisdiction of the
circuit courts in cases fairly within the constitutional grant of
power to the federal judiciary, strikes a blow, by its fifth
section, at improper and collusive attempts to impose upon those
courts the cognizance of cases not justly belonging to them. It
declares, if at any time in the progress of a case, either
originally commenced in a circuit court or removed there from a
state court, it shall appear to said court
"that such suit does not really and substantially involve a
dispute or controversy properly within the jurisdiction of said
circuit court, or that the parties to said suit have been
improperly or collusively made or joined, either as plaintiffs or
defendants, for the purpose of creating a case cognizable or
removable under this act, the said circuit court shall proceed no
further, but shall dismiss the suit or remand it to the court from
which it was removed."
It is believed that a rigid enforcement of this statute by the
circuit courts would relieve them of many cases which have no
proper place on their dockets.
Page 104 U. S. 460
This examination of
Dodge v. Woolsey satisfies us that
it does not establish, nor was it intended to establish, a doctrine
on this subject different in any material respect from that found
in the cases in the English and in other American courts, and that
the recent legislation of Congress referred to leaves no reason for
any expansion of the rule in that case beyond its fair
interpretation.
We understand that doctrine to be that to enable a stockholder
in a corporation to sustain in a court of equity in his own name, a
suit founded on a right of action existing in the corporation
itself, and in which the corporation itself is the appropriate
plaintiff, there must exist as the foundation of the suit --
Some action or threatened action of the managing board of
directors or trustees of the corporation which is beyond the
authority conferred on them by their charter or other source of
organization;
Or such a fraudulent transaction completed or contemplated by
the acting managers, in connection with some other party, or among
themselves, or with other shareholders as will result in serious
injury to the corporation, or to the interests of the other
shareholders;
Or where the board of directors, or a majority of them, are
acting for their own interest, in a manner destructive of the
corporation itself, or of the rights of the other shareholders;
Or where the majority of shareholders themselves are
oppressively and illegally pursuing a course in the name of the
corporation which is in violation of the rights of other
shareholders and which can only be restrained by the aid of a court
of equity.
Possibly other cases may arise in which, to prevent irremediable
injury or a total failure of justice, the court would be justified
in exercising its powers, but the foregoing may be regarded as an
outline of the principles which govern this class of cases.
But, in addition to the existence of grievances which call for
this kind of relief, it is equally important that before the
shareholder is permitted in his own name to institute and conduct a
litigation which usually belongs to the corporation, he should show
to the satisfaction of the court that he has exhausted all
Page 104 U. S. 461
the means within his reach to obtain, within the corporation
itself, the redress of his grievances, or action in conformity to
his wishes. He must make an earnest, not a simulated, effort with
the managing body of the corporation to induce remedial action on
their part, and this must be made apparent to the court. If time
permits or has permitted, he must show, if he fails with the
directors, that he has made an honest effort to obtain action by
the stockholders as a body in the matter of which he complains. And
he must show a case, if this is not done, where it could not be
done or it was not reasonable to require it.
The efforts to induce such action as complainant desires on the
part of the directors, and of the shareholders when that is
necessary, and the cause of failure in these efforts should be
stated with particularity, and an allegation that complainant was a
shareholder at the time of the transactions 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 in a case of which it could
otherwise have no cognizance, should be in the bill, which should
be verified by affidavit.
It is needless to say that appellant's bill presents no such
case as we have here supposed to be necessary to the jurisdiction
of the court.
He merely avers that he requested the president and directors to
desist from furnishing water free of expense to the city, except in
case of fire or other great necessity, and that they declined to do
as he requested. No correspondence on the subject is given. No
reason for declining. We have here no allegation of a meeting of
the directors, in which the matter was formally laid before them
for action. No attempt to consult the other shareholders to
ascertain their opinions, or obtain their action. But within five
days after his application to the directors this bill is filed.
There is no allegation of fraud or of acts ultra vires, or of
destruction of property, or of irremediable injury of any kind.
Conceding appellant's construction of the company's charter to
be correct, there is nothing which
forbids the corporation
from dealing with the city in the manner it has done. That
Page 104 U. S. 462
city conferred on the company valuable rights by special
ordinance; namely, the use of the streets for laying its pipes, and
the privilege of furnishing water to the whole population. It may
be the exercise of the highest wisdom to let the city use the water
in the manner complained of. The directors are better able to act
understandingly on this subject than a stockholder residing in New
York. The great body of the stockholders residing in Oakland or
other places in California may take this view of it, and be content
to abide by the action of the directors.
If this be so, is a bitter litigation with the city to be
conducted by one stockholder for the corporation and all other
stockholders, because the amount of his dividends is
diminished?
This question answers itself, and without considering the other
point raised by the demurrer, we are of the opinion that it was
properly sustained, and the bill dismissed, because the appellant
shows no standing in a court of equity -- no right in himself to
prosecute this suit.
Decree affirmed.