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corporate franchise, it is not rational to imply an agreement be. tween the members, from the mere acceptance by them of the corporate franchise, so surrenderable, that the assets shall be transferred only on unanimous consent.
The court concluded that the statute permitting voluntary dissolution should be taken to alter the common law only in where the business was to be discontinued. There must be disintegration, a discontinuance of the business to make it a dissolution “within the meaning of the statute.”
This comes close to holding that the rights of the minority stockholders are, notwithstanding the statute, the same as they are at common law. It is submitted that such a construction was unjustified; but whether it was justified or not is not the main question which interests us. Assume it is proper to construe the statute as not (for the purpose in hand) altering the common law. The question remains: What was the common law? And the answer of the court to that question was wrong.
There is danger that Theis v. Spokane Gas Co. may be regarded as an authority that no dissolution is a bona fide dissolution unless there is a disintegration of the business.
Any such doctrine would be so destructive of values as to be very deplorable. All courts have heretofore concurred in holding that, certainly if the corporation were financially embarrassed, the majority may cause the corporate assets to be transferred. The very idea of such a transfer is to prevent disintegration and a discontinuance of the business. The assets are transferred with intent that the business shall be continued by another legal unit. The fact that the purchasing corporation is controlled by the majority in the selling corporation does not make the transfer objectionable.71
So where the assets of a prosperous corporation are transferred to an outside purchaser (the first case put in this article) they are of course transferred with intent that the business shall be continued by another legal unit.
Now if the assets of a prosperous corporation are bought in by the majority of the stockholders at a sale by public auction (under the safeguards suggested above), what ground is there for the
71 Treadwell v. Salisbury Mfg. Co., 7 Gray (Mass.) 393 (1856); Phillips o. Providence Steam Engine Co., 21 R. I. 302, 43 Atl. 598 (1899).
charge that this is not done in good faith? To use a term like “good faith” with a vague moral flourish is very unfair. The question whether the majority have acted properly depends on the answer to two specific questions. First, had they a right to cause the assets to be so offered for sale? Second, had they a right to bid at such sale?
The person to conduct the sale should be selected by the corporate officers. If there were any question of the independence of this person, no doubt the court would enjoin a sale until a proper person was selected. But this point presents no real practical difficulty. And if the sale is being properly conducted, it is submitted that there is no valid objection to any stockholder participating in the bidding. In sales of partnership property, on dissolution, the usual course is for all partners to have leave to bid.
Therefore we are remitted to the first question: Did the majority have a right to cause the assets to be offered for sale? Did the majority have the power to bring to a termination the conduct of the enterprise by this corporation? It is submitted that they did, and that their hope of resuming control of the assets through purchase at the sale and using those assets in what they believe will be a more advantageous manner carries with it no taint of impropriety. They have the control under present conditions; they are risking that control in the hope of getting better conditions.
In Riker & Son Co. v. United Drug Co.72 the directors of the United Drug Company, a New Jersey corporation, were of opinion that it was desirable that all the assets of the New Jersey corporation should be transferred to a Massachusetts corporation formed primarily for the purpose of receiving such assets and continuing the business. The plan proposed that the assets should be paid for "by delivering to the holders of stock of the New Jersey corporation in exchange for that stock shares of the stock of the Massachusetts corporation.”
The court treated this as amounting to a consolidation of the New Jersey corporation with the Massachusetts corporation; held that there was no authority for the consolidation of a New Jersey corporation with a foreign corporation; and enjoined the holding of a meeting of the stockholders to vote upon dissolving the New Jersey corporation as a part of this plan. (In New Jersey the
79 N. J. Eq. 580, 82 Atl. 930 (1911).
holders of two thirds of the stock may voluntarily dissolve the corporation.)
This plan was doubly objectionable. It was proposed to transfer the assets at private sale to a corporation which would be controlled by a majority of the old stockholders; and the consideration was to be the stock of the new corporation.
It is unlawful that a stockholder should, directly or indirectly, be embarked upon a venture different from that to which he agreed. If the assets and stocks of corporations X and Y are consolidated, so that a stockholder of X finds himself a stockholder in the con
a solidated corporation, he has been so embarked. If the assets of a New Jersey corporation are transferred to a Massachusetts corporation, and the stockholder in the New Jersey corporation finds that all he has is a right to stock in the Massachusetts corporation, he has been so embarked.
To this all would agree. But we find this language:
“The prime purpose of the scheme . . . is not the winding up of the New Jersey corporation and the distribution of its assets, or the proceeds of the sale thereof, among its stockholders, but the absorption of that company by the Massachusetts corporation, the transfer not only of its assets but of its business, to that corporation, and the future carrying on of that business by the Massachusetts corporation under the name of the defendant company. The scheme, in its essence, whatever it may be in form, is not a plan for the re-organization of the New Jersey company, nor even for the winding-up of its business and its dissolution within the meaning of the latter word as used by our Corporation act, but is a scheme for its merger into or consolidation with the Massachusetts corporation. . . . The scheme, in the carrying out of which the dissolution of the company is a proposed step, is a fraud upon the statute (the word is used in a legal, not a moral, sense).” 73
Would the New Jersey court say that a sale at public auction, with the safeguards suggested above, was a fraud on the statute?
It is submitted that such a sale would not be a fraud on the statute, or on the minority stockholders. If, indeed, at common law a minority stockholder has the right that his money shall not be returned to him before he desires it, and the statute has not changed the common law, such a sale should be enjoined. But this rule, stated by the master in Kean v. Johnson, was repudiated in Black v. Delaware Canal Co.74
73 Pages 582, 583.
22 N. J. Eq. 130 (1871).
That is the nub of the whole matter. If a minority stockholder has such a right, then he has a strangle hold. But if not, then while he may insist, on his side, that there be no variation in the terms of the undertaking by the corporation of which he is a member, the majority, on their side, may insist that the undertaking, as so conducted, be brought to a termination. The right of the minority that there shall be no change is balanced against the right of the majority that there may be a termination.
The right of the minority that there should be no change has always been clear, and conceded by everyone. The right of the majority to terminate has been clouded by misstatements and cumulative misconceptions. But the majority did have that right at common law. Nor has this been essentially altered by the statutes; the statutes may make, for example, two thirds necessary to a dissolution, where any majority was sufficient at common law; and it may be that such statutes should be construed to require that a sale made as a step preliminary to dissolution should be authorized in the same manner as a dissolution; but this is the extent of the statutory changes.
The right of the minority that there shall be no change while the corporation continues to conduct the undertaking must not be infringed, directly or indirectly. But the right of the majority to terminate the conduct of the undertaking by the corporation is entitled to equal respect, and must not be infringed, directly or indirectly.
This is a subject fit for a treatise. It would be interesting to speak of the lease of corporate assets; of the statutes that have been passed in some states giving the majority a right to purchase the shares of minority stockholders; of agreements that may be included in organization papers which will make plain the right of the majority to sell the corporate assets; and of the possibility of amending organization papers so as to introduce such agreements. But to speak of these matters would be to prolong this article to altogether undue length.
Edward H. Warren. HARVARD LAW SCHOOL.
HARVARD LAW REVIEW
Published monthly, during the Academic Year, by Harvard Law Students
THE LAW SCHOOL. - A matter that should be of particular interest to the profession of law generally is the memorial pamphlet to Dean Thayer recently published by the Harvard Law School Association. The pamphlet is intended to describe Thayer's work as Dean and as law teacher, and the work of the School under his leadership. It contains a reproduction of the portrait that now hangs in Langdell Hall, together with a note of the proceedings on its presentation to the School, Mr. Dunbar's sketch of Thayer's life, Thayer's last report as Dean to the President of the University, reprints of his articles "Public Wrong and Private Action," "Judicial Administration," "Observations on the Law of Evidence," and "Liability Without Fault," and an account of Roscoe Pound, Thayer's successor in the Deanship. Dean Pound's brief address on the acceptance of the portrait is noteworthy:
"The law teachers of the second third of the nineteenth century, whose portraits hang in the reading room of Austin Hall, had to do with a body of rules received from the mother country, which, though they had been selected and adapted to America, were received and conceived of as rules, proved by their antiquity and justified in that they afforded a certain basis for human conduct even if sometimes an arbitrary one. It was enough for this generation of teachers to take the body of legal rules as they found it, to arrange if for convenient exposition, and to set forth these rules in such form as to enable the student to grasp them. We were still primarily an agricultural country. Problems of urban life were not of moment until after the Civil War, and were not pressing