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(31 N. D. 116, 153 N. W. 279.)
an opportunity to vote on each and every ballot held, and voted upon some of such ballots; that at such annual meeting of the stockholders the following resolution was unanimously adopted: 'No. 7. Whereas, to the best knowledge and belief of the majority of the stockholders of this company, a certain resolution was adopted at the regular annual meeting of the stockholders on July 3, 1912, which provided for four of the seven directors to be elected for a term of two years, and three for a term of one year, and provided that the board of directors should designate which members should serve for two years, and which members for one year; and whereas the secretary then acting failed to enter such action of the stockholders in the minutes of the meeting; and whereas the directors all at this meeting on July 6th, 1912, carried out a portion of said instruction by providing that four of the directors were elected for two years and three for one year, and did at their meeting on January 30th, 1913, carry out the full instruction of the stockholders at their meeting on July 3, 1912, by the passage of a former by-law providing that four of the seven directors should hold office for a term of two years, and three for a term of one year, and designating George Magee, William Hoeft, Frank Eberl, and Sam Swanson as directors to hold for a term of two years, and John C. Taylor, Henry Albreacht, and R. A. Haase directors to hold for a term of one year. Now, therefore, be it resolved by the stockholders of this company that the said action of said stockholders, as directed at their respective meetings on July 3 and July 6, 1912, and of the said directors on January 30, 1913, as hereinbefore set forth, be and the same hereby is in all respects approved, ratified, and confirmed, and is hereby adopted as the action of this assembly.' That at such stockholders' meeting the president announced that three directors were to be elected, and E. L. Bunker, S. E. Kepler, and E. J. Ray
mond received a majority of the
Messrs. W. P. Costello and Miller &
Messrs. R. L. Phelps and Newton, Dullam, & Young, for respondents: Plaintiff does not come into equity with clean hands.
New England Trust Co. v. Abbott, 162 Mass. 148, 27 L.R.A. 271, 38 N. E. 432; Adley v. Whitstable Co. 17 Ves. Jr. 322, 34 Eng. Reprint, 124, 11 Revised Rep. 87; Seattle Trust Co. v. Pitner, 18 Wash. 401, 51 Pac. 1048; Cratty v. Peoria Law Library Asso. 219 III. 523, 76 N. E. 707; Thomp. Corp. § 980; John C. Grafflin Co. v. Woodside, 87 Md. 146, 39 Atl. 413; Vogel v. Pekoc, 157 Ill. 339, 30 L.R.A. 491, 42 N. E. 386; Griffin v. Bristle, 39 Minn. 456, 40 N. W. 523; McDermott v. Mahoney, 139 Iowa, 292, 115 N. W. 32, 116 N. W. 788; McFadden v. Los Angeles County, 74 Cal. 571, 16 Pac. 397; Austin v. Searing, 69 Am. Dec. 665, and note, 16 N. Y. 112; Michigan Pipe Co. v.
Fremont Ditch, Pipe Line & Reservoir Co. 49 C. C. A. 324, 111 Fed. 287; Edward Thompson Co. v. American Law Book Co. 62 L.R.A. 607, 59 C. C. A. 148, 122 Fed. 922; Fetridge v. Wells, 4 Abb. Pr. 144; Manhattan Medicine Co. v. Wood, 108 U. S. 218, 27 L. ed. 706, 2 Sup. Ct. Rep. 436; Scranton Electric Light & Heat Co.'s Appeal, 122 Pa. 154, 1 L.R.A. 285, 9 Am. St. Rep. 79, 15 Atl. 446.
Bad faith on the part of defendants has not been shown.
State ex rel. Page v. Smith, 48 Vt. 266; Rural Homestead Co. v. Wildes, 54 N. J. Eq. 668, 35 Atl. 896.
The unissued stock was properly sold to any persons who were willing to purchase the same. The original stockholders had no preferential right thereto.
Curry v. Scott, 54 Pa. 270; Reese v. Bank of Montgomery County, 31 Pa. 78, 72 Am. Dec. 726; Ohio Ins. Co. v. Nunnemacher, 15 Ind. 294; Gray v. Portland Bank, 3 Mass. 364, 3 Am. Dec. 156; Grant, Corp. 226, 231, 252; Hodges v. New England Screw Co. 1 R. I. 312, 53 Am. Dec. 624.
Plaintiff has never offered to take, nor demanded a pro rata share of the unissued stock.
Gray v. Portland Bank, 3 Mass. 364, 3 Am. Dec. 156; Stokes v. Continental Trust Co. 186 N. Y. 285, 12 L.R.A. (N.S.) 969, 78 N. E. 1090, 9 Ann. Cas. 738; Jones v. Morrison, 31 Minn. 140, 16 N. W. 854; Thomp. Corp. ¶ 3648; Bonnet v. First Nat. Bank, 24 Tex. Civ. App. 613, 60 S. W. 325; Wilson v. Bank of Montgomery County, 29 Pa. 537; Crosby v. Stratton, 17 Colo. App. 212, 68 Pac. 130.
Plaintiff has waived his right to a pro rata portion of the stock.
Gray v. Portland Bank, supra; Jones v. Morrison, 31 Minn. 140, 16 N. W. 854; Crosby v. Stratton, supra; Bonnet v. First Nat. Bank, 24 Tex. Civ. App. 613, 60 S. W. 325; Hoyt v. Shenango Valley Steel Co. 207 Pa. 208, 56 Atl. 422; Thomp. Corp. §§ 3645, 3648; Stokes v. Continental Trust Co. 186 N. Y. 285, 12 L.R.A. (N.S.) 969, 78 N. E. 1090, 9 Ann. Cas. 738; Curry v. Scott, 54 Pa. 270.
Plaintiff is estopped to complain of irregularities in the election of officers.
Thomp. Corp. §§ 921, 935; People ex rel. Swan v. Loomis, 8 Wend. 396, 24 Am. Dec. 33; State ex rel. Martin v. Thompson, 27 Mo. 365; Philips v. Wickham, 1 Paige, 590; Re Argus
Printing Co. 1 N. D. 434, 12 L.R.A. 787, 26 Am. St. Rep. 639, 48 N. W. 347; State ex rel. Martin v. Chute, 34 Minn. 135, 24 N. W. 353.
Bruce, J., delivered the opinion of the court:
It is difficult for us to find in the voluminous record which is before us, or in the brief of counsel, any ground whatever on which the plaintiff can seek equitable relief. He seeks the control of the corporation, and complains that stock has been sold since he obtained the ma
jority thereof, and that the purpose of this sale was to take the control from him, when, as a matter of fact, the only purpose for which he acquired the stock which he did, and which he admits was acquired through "dummies" and in violation of the agreement between the stockholders that no person should acquire more than ten shares, was in order that he himself might get that control. The evidence is clear that the stock of the corporation has at all times been for sale, and that quite recently, and before the sale of the seventy shares which plaintiff now seeks to set aside, he himself had the opportunity of buying fifty of these shares, and thus of gaining a permanent control. proposition, however, is that if the motive of the directors of a corporation in selling the balance of the unsold capital stock, or in taking subscriptions thereto, is to take the control from one who holds the majority of the shares before such sale, such sale is fraudulent and may be set aside, even though such stock is sold at par and the money therefor is collected. This proposition is to us a novel one, and has no support whatever in principle or in the authorities. Section 4525, Compiled Laws of 1913, provides that, "after the secretary of state issues the certificates of incorporation as provided in § 4512, the directors named in the articles of incorporation must proceed in the manner specified
in their by-laws, or, if none, then in such manner as they may by order adopt, to open books of sub
(31 N. D. 116, 153 N. W. 279.)
scription to the capital stock then unsubscribed, and to secure subscriptions to the full amount of the fixed capital; and to levy and collect assessments thereon in the manner provided by article 7  of this chapter."
The only understanding that we can derive from this section is that it was the intention of the legislature that the stock of private corporations, even if not to be looked upon as a trust fund, so that the same might not be depleted by dividends after once having been collected (see discussion in 4 Thomp. Corp. 2d ed. §§ 3415 et seq.; on this question we are not here required to pass), should be fully subscribed for as soon as possible, and this not merely for the protection of the public, who, when it is dealing with a $10,000 or a $50,000 corporation, has the right to deal with one which is not on paper merely, but for the protection of the subscribers to the stock, who have the right to believe that they are subscribing for stock in a corporation which will have funds, or at any rate have subscribers who can be held for the amount which will be sufficient for fully developing the purpose and business of the institution.
"The stockholders," too, says the supreme court of Wisconsin, in Adler v. Milwaukee Patent Brick Mfg. Co. 13 Wis. 57, "being in general free from personal responsibility, the capital stock constitutes the sole fund to which creditors look for the liquidation of their demands. It is the basis of the credit which is extended to the corporation by the public, and a substitute for the individual liability which exists in other cases. So far as the creditors are concerned it is regarded in the law as a trust fund pledged for the payment of the debts of the corporation." And how can stock which is not subscribed for, and which, in cases of insolvency or approaching insolvency, would never be subscribed for, be any protection to the creditors of a corporation or to the stockholders who have already sub
scribed, and who have rights which should be protected. It is to be remembered that in the case at bar we are not dealing with treasury stock which has been bought in or otherwise acquired by the corporation, but with the unsubscribed balance of the capital stock, which § 4525, Compiled Laws of 1913, says the directors must endeavor to have subscribed to the full amount, and which constitutes the only asset with which a corporation comes into the world. It is clear to us that no stockholder should be allowed to complain because the directors have done their duty,
Corporationand have not mere- excessive ly ly obtained sub- capitalizationscriptions for, but
have obtained the payment in full and at par for, the balance of the stock which the public and the other stockholders had the right to believe the corporation would have subscribed.
It may be, and on this question we are not required to pass, that the stockholders of a corporation have a preference in regard to subscriptions to the treasury stock, but we as yet know of no case which has held that one who has purchased a majority of the stock of a corporation at a time before the stock has been fully subscribed has a vested interest in the control of the corporation so that the remaining stock may not be sold and subscribed for, nor can we see any reason for such a holding. The evidence, it is true, shows that the sale of such stock was not absolutely necessary to the existence of the corporation. It is quite clear, however, that with the increased money the business could be greatly enlarged, and more economically conducted. Even if it would not, the public and the stockholders had a right to have the stock subscribed.
Not only is this true, but the plaintiff is hardly in the position to come into a court of equity and complain of his loss of the control of the corporation. It is clear from the record that he was the original
promoter of the enterprise, and that as such he drew an agreement and contract of subscription in which it was provided that no stockholder should hold more than ten shares. The purpose of this agreement was that the elevator could be in fact, as well as in name, a farmers' elevator, and that the farmers of the community might be generally interested and benefited thereby. It is clear that, even though he may not have signed this agreement himself, a number of the subscriptions were taken on it with his knowledge and acquiescence. It is also shown that this agreement was later embraced in the by-laws of the company, and we find no objection in the record made by the plaintiff to the adoption of this by-law. It is also clear from the testimony that, though plaintiff may have had some doubt of the validity of the by-law, he was so far controlled thereby that he obtained the subscriptions to the shares of stock which gave him his majority, in the names of his family and his friends, for the purpose of evading the same. He now comes into a court of equity and asks relief because the officers of the corporation at one time refused to transfer on the books of the corporation the assignments of these "dummies" to him, though in spite of this fact he was allowed to vote the shares of stock at the meetings of this corporation. It is unnecessary for us to say whether the by-law was valid or not. It is sufficient to say that the subscribers to the stock of a corporation may enter into an agreement, under the terms of which neither themselves nor subsequent subscribers to the stock will be entitled
of equity and complain because others have obtained control of the corporation, and this not by evading the agreement, but by doing that which the law contemplates.
There is, too, no merit in the proposition that, on account of the prosperous condition of the corporation and some accumulated earnings, the stock was worth more than par, and that a fraud was committed on the plaintiff by the sale at par. We are here, it is to be remembered, not dealing with treasury stock, but with the original unsubscribed capital stock, the value of which was fixed by the articles of incorporation. The record of the corporation in the past has shown that it has not been a wise thing to dissipate all of its earnings in dividends, and though the plaintiff complains that the directors are about to declare dividends and to apportion the same on the new stock, as well as on the old, there is absolutely no proof in the record of this fact. Whether the new stock would share in the past profits it is not necessary for us to determine. It is shown, indeed, that during the second year of the existence of the corporation accumulated profits of 7 per cent were entirely swept away by a failure of crops. The record shows also that no provision has been made for deterioration. It also shows that a feed mill is a part of the scheme of the corporation, and reasonably necessary. It further shows that running capital is necessary in order to save borrowing money, and to be able to take advantage of the exigencies of the market.
Plaintiff's sole and only ground of complaint, when reduced to its essentials, is that he has lost the control of the corporation by the officers of the corporation doing that which the statute contemplates that they should do, that is, by obtaining subscriptions to all of the shares of capital stock, when he himself at no time would have had that control if he had not violated his agreement with the other stockholders. The record shows no mismanagement or
(31 N. D. 116, 153 N. W. 279.)
business inability on the part of the directors. There is no pretense that any of the other stockholders own or control more than ten shares. We agree thoroughly with the finding of the trial court that he does not come into equity with clean hands, and that he is not entitled to any relief herein, but should be left in the position in which the court finds him.
-violation of subscription
The above considerations, we think, are the only ones that are material in this case, though other questions are involved.
The judgment of the District Court is affirmed.
A petition for rehearing having been filed, on June 15, 1915, Bruce, J., handed down the following additional opinion:
Our attention is called in the petition for a rehearing, to the decision in the case of Luther v. C. J. Luther Co. 118 Wis. 112, 99 Am. St. Rep. 977, 94 N. W. 69, which, although referred to in the main brief, is claimed to have been overlooked by us. In that case, however, although relief was granted to the plaintiff and his co-complainants, it was granted wholly on account of the co-complainants, and not on account of the plaintiff. The court in the opinion expressly said: "Were Clarence J. Luther the sole plaintiff, we should have little doubt
that he ought to be dismissed from a court of equity without relief, for the reason that his own conduct has been so in outrage of his duties as a director and officer of the corporation that no court can patiently listen to his prayer for enforcement of fiduciary principles and duties. That objection does not, however, exist to some of the other plaintiffs, who, as stockholders, ask that their rights be protected as to them."
In the case at bar, C. A. Cross is the sole plaintiff. No other creditors or stockholders complain. He does not come into equity, therefore, with clear hands, and even the decision of Luther v. C. J. Luther Co. would deny him relief.
The petition for a rehearing is denied.
The maxim, "He who comes into equity must come with clean hands," is held in the reported case (CROSS v. FARMERS ELEVATOR CO. ante, 13) to prevent a promoter who, in violation of the subscription agreement, purchased through "dummies" a controlling interest, from obtaining equitable relief against the acts of the directors in selling stock in such manner as to deprive him of the control. The cases involving the maxim in question are reviewed in the note following LANGLEY V. DEVLIN, post, 44.
1. Where a deed is executed and placed on record by a grantor for the purpose alone of placing the property beyond the reach of his creditors, and such deed is not delivered by the grantor to the grantee or anyone
Headnotes 1 and 2 by COLLIER, C.