different proposition from permitting him to say to the majority: "Proceed under the original plan until I say the word to quit."

III

We return to the first case put at the opening of the article. A corporation, X, has sufficient liquid assets to meet its obligations as they mature, and is making large net profits. An offer is made by Y to purchase its assets. The directors, and the holders of a large majority of its stock, vote to accept the offer. Should a court, in a suit by a minority stockholder, enjoin the proposed transfer of assets?

The courts have sometimes reasoned thus: at common law a corporation may not be dissolved without the unanimous consent of its members; a transfer of all the assets is equivalent to dissolution; therefore at common law a corporation may not transfer all its assets without the unanimous consent of its members.

Of course a surrender of the corporate franchise and a transfer of all its assets are different things, and there is authority for the proposition that, although by statute a corporation may not be dissolved except by unanimous consent of its members, nevertheless a majority may transfer all its assets.53 But no conclusion reached in this article is dependent on this distinction, we will assume that a surrender of the corporate franchise and a transfer of all its assets are so closely associated that they should be governed by the same rules.

At common law the surrender may be made on a vote of the majority of the members; then the transfer may be made by like

vote.

The power of the majority to transfer corporate assets was considered in Treadwell v. Salisbury Mfg. Co. The plaintiffs, as trustees, held stock in the Salisbury Manufacturing Company, a corporation. A majority of the stockholders voted to authorize the directors to sell, at public or private sale, all the property of the corporation connected with the manufacture of goods providing, "that in case a sale be made to a new company, provision shall be made that the stockholders in this company, at the time of such sale, shall

3 Beidenkopf v. Insurance Co., 160 Iowa 629, 142 N. W. 434 (1913). See also Treadwell v. Salisbury Mfg. Co., 7 Gray (Mass.) 393, 406 (1856).

have a right to take an interest in the new one, in proportion to their respective interests in this." The plaintiffs averred that the directors proposed to sell such property, at private sale, to a new corporation composed mainly of the members of the old corporation, for $250,000 payable in stock of the new corporation, and that this stock was to be divided among the stockholders of the old corporation.

The court seems to have accepted the contentions of the defendants as to the financial condition of the corporation. It was solvent; it could pay its debts and have a surplus "if prudently and discreetly conducted"; but a large amount of additional capital was needed for the successful prosecution of the business; the old corporation had great difficulty in procuring money; the proposed arrangement was, in the judgment of the directors, "the only proper and feasible course," and, if it were not adopted, the corporation "must stop business." 55

The court said:

"We entertain no doubt of the right of a corporation, established solely for trading and manufacturing purposes, by a vote of the majority of their stockholders, to wind up their affairs and close their business if in the exercise of a sound discretion they deem it expedient so to do. At common law, the right of corporations, acting by a majority of their stockholders, to sell their property is absolute, and is not limited as to objects, circumstances, or quantity." 56

The court also said:

"By accepting a charter, they do not undertake to carry on the business for which they are incorporated, indefinitely, and without any regard to the condition of their corporate property. . . . Upon the facts found in the case before us, we see no reason to doubt that the vote of the majority of the stockholders, for the sale of the corporate property, and the closing of the business of the corporation, was justified by the condition of their affairs." 57

This case has frequently been cited as establishing the proposition that the holders of a majority of the stock may cause the corporate assets to be transferred if the corporation is in financial embarrassment. But the court expressed its opinion in favor of the large proposition that the majority could transfer all the cor57 Pages 404, 405.

55 Pages 397-98.

b6 Page 404.

porate assets whenever they deemed it expedient to do so. The majority must act fairly toward the minority; it is pertinent to inquire if the majority have any legitimate business reasons for making the transfer; in its examination of the facts, the court found there was a legitimate business reason. This opinion cannot justly be interpreted as stating that a majority may cause the corporate assets to be transferred only in case the corporation is financially embarrassed. Such embarrassment may be a legitimate reason for the transfer; but there may be legitimate reasons unconnected with financial embarrassment.

Shortly before the Treadwell case, Kean v. Johnson 58 had been decided. The legislature of New Jersey authorized X, a railroad corporation, to purchase the road of Y, another railroad corporation. X took a conveyance authorized by the holders of a majority of the stock of Y. A dissenting stockholder of Y prayed that this conveyance be upset. As the Chancellor had been concerned in the cause as counsel, the matter was referred to a master, who advised that a demurrer to the bill should be overruled.

One possible interpretation of the master's report is that he was of opinion that as Y was a public-service corporation, its assets could not be transferred without the consent of the state; that the state could condition its assent in any way it saw fit; and that a proper construction of the legislative act showed that the legislature authorized the transfer only if all the stockholders of Y assented.

But the master's report may be interpreted as expressing the opinion that the legislature intended the sale to be made only if the rights of the stockholders, whatever they were by agreement between themselves, were respected; and that by agreement between themselves a sale of the assets of Y was not to be made, so long as it was prosperous, except by the unanimous consent of its members. We will adopt this interpretation of the report.

If, the master said, the stockholders

"had any right as partners or beneficiaries, it would seem to be this, that their money should be devoted to that use, and never employed in any other, nor returned to them before they desire it." 59 (Italics ours.) "The mere statement of the proposition," said the master, seemed to him to prove it. But, with deference to the learned 59 Page 408.

58 8 9 N. J. Eq. (1 Stockton) 401 (1853).

master, it must be said that he treated as the same two things which are radically different.

If associates have contributed their money for the prosecution of one enterprise, of course the majority cannot vary that enterprise. If a stockholder has invested his money in a corporation authorized to run a railroad from A to B, the majority have no authority to vary the enterprise so that the railroad shall run from A to C. And if there is one corporation, Y, authorized to run a railroad from A to B, and another corporation, X, authorized to run a railroad from B to C, the majority of Y have no authority to consolidate the assets and stocks of X and Y, so that a person who consented to become a stockholder in Y shall find himself a stockholder in the consolidated corporation.

But it is a radically different matter to hold that, if persons become the stockholders of a corporation, Y, authorized to run a railroad from A to B, and the holders of a majority of the stock. come to believe, for legitimate business reasons, that it is wise to sell the corporate assets, nevertheless a minority stockholder shall have the right to compel them to continue with the enterprise, until he desires the return of his money invested in the enterprise.

If, said the master, the majority may sell the corporate assets when they see what they deem to be a better investment for their money, the minority must either join in the new enterprise "or take back their money to lie profitless on their hands, until they find another investment." The master apparently regarded this as a great evil, and thought any such rule of law would deter persons from making corporate investments. But if the matter is to be viewed from the point of view of public policy, consider the effect of the master's doctrine upon the majority. If the majority believe that it is wise, for business reasons which seem to them plain, to terminate the venture, any minority stockholder is (under this doctrine) entitled to say to them: "As a question of judgment, you may be right and I may be wrong; but I have a legal right to be wrong, and I propose to stand upon that right." The dread of being obliged at a future date to reinvest his money might have some slight effect upon deterring an investor from making a corporate investment; but the dread of being obliged to continue the enterprise indefinitely, even if the majority believed there

60 Page 413.

were legitimate business reasons for ending it, would have a much greater effect in deterring corporate investments.

Moreover, a majority have a power at common law to surrender the corporate franchise. It cannot rationally be held that the transfer of the corporate assets requires any authorization in excess of that required for the surrender of the corporate franchise. Persons who become stockholders in a corporation must be taken to have contemplated that their affairs should be regulated by the common law, unless they show a contrary intent.

"The contract between the parties is," said the master, "that so long as the affairs of the corporation are prosperous, it shall go on unless all consent to the contrary." But what basis is there for such a dictum? If the corporation becomes insolvent, the sale of assets becomes a question affecting creditors rather than stockholders: why should the power of the majority of stockholders to make a sale arise only when that condition is approached? The legal right of the minority to insist upon his own judgment, though it be wrong, admittedly ceases when disaster approaches. It is not good sense to hold that he may insist upon his own judgment until disaster approaches.

All questions involving an exercise of business judgment to be decided by the stockholders are to be decided by a majority vote. When to stop is as much a question of business judgment as how to proceed.

Perpetuity or disaster. The doctrine of the master that the members are to be deemed to have agreed that the corporate enterprise should be continued forever, or until disaster approaches, finds no support in public policy, or in the common law, or in busi

ness sense.

In Black v. Delaware Canal Co.,61 Chancellor Zabriskie strongly criticised this doctrine.

"There is no case that holds that a majority of corporators, when a time is not specified for which the enterprise must be continued, may not abandon the enterprise and sell out the property of the company. The dictum of Parker, Master, in Kean v. Johnson, is the only authority which I find in support of the doctrine. . . . Becoming incorporated for a specified object, without any specified time for the continuance

61 22 N. J. Eq. 130 (1871).