Story Case

The Norfolk Fire Insurance Company was a corporation, organized under the laws of the state of Virginia, for the purpose of insuring property against loss by fire. After continuing for several years in this business, it decided that it would also engage in the business of life insurance, although it had no corporate power to do so. Notwithstanding this, however, the directors of the corporation, in accordance with a majority vote of the stockholders, made preparation to enter the field of life insurance. Thereupon, several stockholders in the company brought this bill to have the corporation enjoined from going into life insurance. What should be the decision of the Court under the foregoing circumstances?

Ruling Court Case. Babe Vs. Dunlap, Volume 51 New Jersey Equity Reports, Page 40

The Lake Hopatcong Land and Improvement Company was a corporation, organized under the laws of the state of New Jersey, with a capital of $50,000, divided into 500 shares of $100 each. Only 249 of the shares had been issued at the time this action was brought. Rabe and the other complainant held 11 of the 249. Sometime later, this corporation consolidated with three other similar organizations. At the time the vote was taken on the question of consolidation, neither of the complainants was present, nor were they represented at the meeting of the stockholders. In pursuance of the plan of consolidation, the Lake Hopatcong Land and Improvement Company conveyed all its property to the new corporation. In the course of its business the new corporation borrowed money from Dunlap and gave a mortgage on all the corporate property, including that property which formerly belonged to the Lake Hopatcong Land and Improvement Company; the loan was not repaid at maturity and Dunlap brought an action to foreclose the mortgage on the corporate property. It was then that Rabe and another stockholder, representing 11 shares of stock, intervened and asked that the consolidation of the four corporations be declared void, that the conveyance by the Lake Hopatcong Company to the new corporation be declared invalid, and that the mortgage on all the property by the new corporation to Dunlap be declared ineffective to pass any interest in the property. Rabe based this demand upon the theory that his corporation had no power to consolidate with other corporations; and that all acts performed by the corporation, in pursuance of such consolidation was void.

Decision

In general, where the directors of a corporation are exceeding the corporate powers, wasting the capital stock, and conducting the business of the corporation in an unauthorized way, stockholders are entitled to have them enjoined. But in order to be entitled to this right, it must appear that the complaining stockholders were diligent. In this case, diligence on the part of Rabe and his associate is not shown. They did not even attend the meeting and vote against the proposed consolidation, even though apprised of the purpose of the meeting. Also, for several years, they paid no attention to the affairs of the corporation. Consequently, they are not entitled to the relief for which they now ask.

Mr. Van Fleet, Vice Chancellor, said in part: "That the conveyance by the complainants' corporation of all its property to the new corporation, for the purpose of appropriating it to new and different purposes from those for which the grantor corporation held it, was without power or right, and a plain misappropriation of the property, as against non-assenting stockholders, is a proposition that was not disputed on the argument. It cannot be. It is incontestable. The stockholders of a corporation have an indisputable right to have the property of a corporation applied and used exclusively for the purposes specified in its charter, and any attempt by its managers to appropriate it to any other purpose is a usurpation of power, and a violation of the rights of the stockholders. No rule of law is better settled than that which declares that a corporation created by statute, either special or general, can exercise no power, and has no rights, except such as are granted by express words or fair implication; and in the construction of such grants the rule is well settled that it must be held that what is fairly implied is as much granted as what is clearly expressed. By the charter of the complainants' corporation, its managers are given no power whatever to carry on the business of an innkeeper or that of a common carrier, or to embark the property of the corporation in such or like enterprises. They are radically different from, and wholly foreign to, the purposes specified in its charter. • • • But the stockholders to be entitled to the summary interference of the court in cases where they seek protection against acts which are merely in excess of the power of the corporation, and are not prohibited by law, must be diligent."

The Court, having found that Rabe and his associate were not diligent in pursuing their remedy against the managers of the corporation, held that they were not entitled to the relief for which they have asked. Judgment was, therefore, given for Dunlap.

Ruling Law. Story Case Answer

When the directors of a corporation, or even a majority of the stockholders, are threatening to make a fundamental change in the nature of the corporation, or to enlarge its scope of power, the minority may object to the proposed changes, even though they have not demanded of the directors that the proposed change be abandoned. It is the right of every shareholder to see that his corporation remains within the scope of its powers. If it threatens to exceed them, any shareholder may object, and, at the objection of such stockholders, the Court will enjoin the corporation from proceeding. In the Story Case, the corporation was proposing to enter an entirely new field of activities without legislative authority, and without the consent of all the stockholders. The Court should, therefore, enjoin the corporation from this act.