Neb. 412, 68 N. W. 628, 5 A. & E. Corp. Cas. N. S. 382, 35 L. R. A. 444; 1897, Ewing v. Composite, etc., Co., 169 Mass. 72; 1897, Gates v. Tippecanoe Stone Co., 57 O. S. 60, 48 N. E. Rep. 285, 7 A. & E. Corp. Cas. N. S. 431.

Sec. 21. Same. (d) When corporate sins result from the concerted, but apparently individual, actions of the corporation members.

THE PEOPLE, ETC., RESPONDENT, V. THE NORTH RIVER SUGAR REFINING COMPANY, APPELLANT.1

1890. IN THE COURT OF APPEALS OF NEW YORK. 121 N. Y. 582-626, 18 Am. St. Rep. 843, 32 Am. & E. Corp. Cas. 149, 24 North Eastern Rep. 834; also in the lower court, 54 Hun 354, 7 N. Y. Supp. 406, 22 A. & E. Corp. Cases 511, 5 Ry. & Corp. L. J. 56, 6 Ry. & Corp. L. J. 442.

Appeal from judgment of the general term of the supreme court in the first judicial department, entered upon an order made November 7, 1889, which affirmed a judgment in favor of plaintiff entered upon a verdict directed by the trial court, and affirmed an order denying a motion for a new trial.

This action was brought by the attorney-general to have the defendant "dissolved, its charter vacated and its corporate existence annulled." This complaint alleged, and it was found that defendant is a corporation organized under the general manufacturing act; that it, together with other corporations and firms, in violation of law and in abuse of its powers, became a party to and carried out an agreement which among other things provided in substance as follows:

Deed: The undersigned, namely, Havemeyers & Elder [and fourteen other sugar refining partnerships and corporations named, including the North River Sugar Refining Co.], for the purpose of forming the board, hereinafter provided for, and the other purposes hereinafter set forth, enter into the following agreement: Name, the board shall be designated the Sugar Refineries Company. Objects: (1) To promote economy of administration, reduce the cost of refining, and keep the price of sugar as low as is consistent with reasonable profit. (2) To give each refining company benefit of all appliances and processes known or used by the others, useful to improve quality, and diminish cost of sugar. (3) To protect against unlawful combinations of labor. (4) To prevent the lowering of the standard of refined sugars, and (5) Generally to promote the interests of the parties hereto in all lawful and suitable ways. Board: All parties hereto not corporations, to become such before deed goes into effect; all shares of stock of each corporation to be transferred to a bourd, consisting of eleven persons, any member to be removable by two-thirds of the entire board for incapacity or refusal to serve, vacancies in term to be filled by vote of board, at end of terms by election of certificate holders, at an annual meeting in New York City. Board to make by-laws for themselves, act by proxy if they choose, majority to be a quorum, and majority of quorum to control, except in appropriating money, a majority of all, required; members of board to be members of boards of directors of the

1 Statement of facts condensed. Arguments and parts of the opinion omitted.

several companies; shares in such companies to be transferred to them in order to qualify them, if necessary; members of board to be divided into three classes, first to serve seven years (each being named), second, five years (each named), and third, three years (naming them). Officers: Board to appoint a president, vice-president and treasurer from the members of the board, and a secretary (not necessarily a member of the board), and such other officers as necessary, fixing their duties. Plans: The several parties hereto to maintain their separate organizations, and carry on and conduct their own business. Capital stock of each corporation to be transferred to the board, and certificates not exceeding $50,000,000 (500,000 shares of $100 each) to be issued by the board to each refinery in proportion to the value of its plant as fixed by appraisers to be selected, and each stockholder in each refinery to have such proportion of the certificates issued to each refinery as his stock bore to the stock of that refinery, except 15 per cent. of the shares allotted to each refinery to be left with the board to be disposed of for the purchase of other refineries or increasing the refining capacity of the parties hereto.

The certificate provided that the holder was entitled to shares in the sugar refineries company, subject to the provisions of the deed, transferable on the books of the board upon surrender, subject to right to increase the total stock, or change this deed, and the assignee, by accepting the certificate to be held to agree to the terms of the deed, or changes made therein. The title to the stock of the corporations to be in the members of the board as trustees, strictly as joint tenants and having all the rights and powers incident to stockholders in the several corporations, subject to the provisions of this deed. Profits of each corporation to be paid to the board, and dividends distributed by the board to certificate holders. Changes in the deed to be made by a majority of certificate holders. Other refineries to be added upon terms provided by the board. Custody of the deed to be in the president of the board, with sole and independent control, and not to be shown to any corporation, firm or person whatsoever except by express direction of the board. The stockholders of the North River Sugar Refining Company in April, 1887, at a meeting when all the trustees were present, appointed a committee to make arrangements to consolidate the sugar refineries of New York, and directed the president and secretary to sign such contract as the committee should make for that purpose. The secretary, on behalf of the company, in September signed the foregoing deed to go into effect in October. In November, at a stockholders' meeting, the powers of the committee and the president and secretary were revoked, but it was recited that one John Searles, Jr., had offered to purchase all of the stock for $325,000, and it was unanimously resolved that a committee be appointed to deliver it to him, the proceeds to be divided in proportion to the ownership of shares by the stockholders. Accordingly, the members individually, transferred their shares, indorsed in blank, to Searles, who was a member and the secretary and treasurer of the board created by the deed above set forth; the stock was by Searles transferred to the board, and it issued certificates to the shareholders to the amount of $700,000, less 15 per cent., as provided by the deed; new directors were chosen by the board, Searles became president, and shortly afterward the works of the North River Sugar Refineries Company were closed, and never run thereafter, though it was allotted its share of dividends for its certificate holders.

FINCH, J. The judgment sought against the defendant is one of corporate death. The state, which created, asks us to destroy; and the penalty invoked represents the extreme rigor of the law. Its infliction must rest upon grave cause, and be warranted by material misconduct. The life of a corporation is indeed less than that of the humblest citizen, and yet it envelopes great accumulations of property, moves and carries in large volume the business and enterprise of the

people, and may not be destroyed without clear and abundant reason. That would be true, even if the legislature should debate the destruction of the corporate life by a repeal of the corporate charter; but is beyond dispute where the state summons the offender before its judicial tribunals, and submits its complaint to their judgment and review. By that process it assumes the burden of establishing the charges which it has made, and must show us warrant in the facts for the relief which it seeks.

Two questions, therefore, open before us, first, has the defendant corporation exceeded or abused its powers; and second, does that excess or abuse threaten or harm the public welfare.

The first question requires us to ascertain what the defendant corporation has done in violation of its duty, or omitted to do in performance of its duty. We find disclosed by the proof that it has become an integral part and constituent element of a combination which possesses over it an absolute control, which has absorbed most of its corporate functions, and dictates the extent and manner and terms of its entire business activity. Into that combination, which drew into its control sixteen other corporations engaged in the refining of sugar, the defendant has gone, in some manner and by some process, for, as an unquestionable truth, we find it there. All its stock has been transferred to the central association of eleven individuals denominated a "Board;" in exchange it has taken and distributed to its own stockholders certificates of the board carrying a proportionate interest in what it describes as its capital stock; the new directors of the defendant corporation have been chosen by the board, made eligible by its gift of single shares, and liable to removal under the terms of their appointment at any moment of independent action. It has lost the power to make a dividend, and is compelled to pay over its net earnings to the master whose servant it has become. Under the orders of that master it has ceased to refine sugar, and, by so much, has lessened the supply upon the market. It can not stir unless the master approves, and yet is entitled to receive from the earnings of the other refineries, massed as profits in the treasury of the board, its proportionate share for division among its own stockholders holding the substituted certificates. In return for this advantage it has become liable to be mortgaged, not for its own corporate benefit alone, but to supply with funds the controlling board when reaching out for other and coveted refineries. No one can look these facts fairly in the face without being compelled to say that the defendant is in the combination and in to stay. Indeed, so much is with great frankness admitted on the part of the appellant. Its counsel concedes that the stock was transferred "to the board mentioned in the agreement and on the terms and for the purposes mentioned in the agreement; and that this action effectually lodged the control of the defendant company, so far as such contol can be secured by the voting power in that board."

But that truth does not alone solve the problem presented. We are yet to ascertain whether the corporation became the subordinate and servant of the board by its own voluntary action, or the will and

power of others than itself; by force of a contract to which it was in reality a party, or as the simple consequence of a change of owners; by its fault or its misfortune; by a sale or by a trust. For, if it has done nothing, if what has happened, and all that has happened, is ascertained to be that the stockholders of the defendant, one or many, sold absolutely to the eleven men who constituted the board their entire stock, and the latter, by force of their proprietorship and as owners, have merely chosen directors, in their own interest, and are only managing their property in their own way as any absolute owners may; if that is the truth, and the entire and exact truth, it is difficult to see wherein the corporation has sinned, or what it has done beyond merely omitting for a time to carry on its business. That is the theory upon which the appellant stands, and which it submits to our examination.

On the other hand it is contended that there never was a sale, but a trust constituted by mutual agreement; that they who agreed were the whole body of stockholders in each corporation necessarily representing and binding the corporation itself; that they transferred their shares to the board upon the trusts declared in the deed; that the certificates issued by the board were the formal declaration of the trust; that the corporate stockholders parted with the legal title of their stock to the chosen trustees with the power to vote upon it, but retained, nevertheless, its beneficial ownership through the operation of the certificates; and so the corporations entered into a partnership with each other, vesting the partnership power in a board of control.

I have brought these two theories face to face, where they may confront each other, because, when a choice is made between them, we have gone a long distance towards the end of the controversy.

[After reviewing the provisions of the deed and indicating that a sale implies existing vendors and vendees, a negotiation between them, signing of the formal contract by both, a vesting of the entire dominion in the vendee, with the accompanying rights of ownership, in all of which points the deed was peculiarly deficient; and on the other hand that the board was expressly made trustees, with managing powers of stockholders only by the express terms of the deed, and not as an incident of real ownership; that the right to mortgage was derived from the deed alone, and not as owner; that payment was to be made not by money but by certificates of the board created by the deed, who were not to create any liability either as a whole, or by its members, all of which indicated a trust and nothing more, the opinion proceeds:]

The combination, therefore, framed by the deed was a trust; and, if created by the corporations, or in any respect the consequence or product of their action, some inevitable results would be certain to follow. But here we encounter the stronghold of the appellant's argument which is, that if the corporations are in some manner in the combination, they are there solely as the result of a contract other than their own; are there without corporate action on their part; and so are sufferers and not sinners. The reasoning leading to that result is so severely technical as to have suggested a justification almost reminding one of an apology. We are called upon to sever the corporation, the abstract legal entity, from the living and acting corporators; as it

were, to separate in our thought the soul from the body, and admitting the sins of the latter to adjudge that the former remains pure. Let us first recall the facts in the order of their occurrence.

[After stating the facts in relation to the surrender to the board, substantially as above set forth, p. 101, the opinion proceeds:]

And yet it is argued that the corporation, the legal entity, has done nothing; that Searles was guilty, but the corporate robe that enveloped him was innocent, and so he must be left to wear it undisturbed; that while all that was human and could act had sinned, yet the impalpable entity had not acted at all and must go free. I believe that the history of what occurred, as I have already described it, furnishes a sufficient answer, assuming that stockholders and trustees acting together can do a corporate act at all. There was corporate action in making the combination agreement which bound the defendant. The revocation of an executed authority left the contract standing. The corporation thus helped to make the trust and became an element of it. If there was anything imperfect in its action, the new stockholder and his associates waived the imperfection by acting upon the agreement of the corporation, and so confirming it in all particulars.

But the assumption underlying the view I have expressed is itself contested, and a proposition asserted which denies the possibility of any corporate action, except by the trustees or directors acting formally as such; a proposition which, if sound, dominates the whole field of controversy, and, establishing that there has been no corporate action at all, effectually shuts out every question of illegality or public injury. I can not admit that proposition. I think there may be actual corporate conduct which is not formal corporate action; and where that conduct is directed or produced by the whole body, both of officers and stockholders, by every living instrumentality which can possess and wield the corporate franchise, that conduct is of a corporate character, and if illegal and injurious may deserve and receive the penalty of dissolution.

There always is, and there always must be, corporate conduct without formal corporate action where the thing challenged is an omission to act at all. A corporation organized in the public interest, with a view to the public welfare, and in the expectation of benefit to the community, which is the motive of the state's grant, may accept the franchise and hold it in sullen silence, doing nothing, resolving nothing, furnishing no formal corporate action upon which the state can put its finger and say, this the corporation has done by the agency through which it is authorized to act. That is corporate conduct which the state may question and punish without searching for a formal corporate act. The directors of a corporation, its authorized and active agency, may see the stockholders perverting its normal purposes by handing it over, bound and helpless, to an irresponsible and foreign authority, and omit all action which they ought to take, offer no resistance, make no protest, but silently acquiesce as directors in the wrong which, as stockholders, they have themselves helped to com