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§ 36

The trustee issues to the shareholders in exchange for their shares trust certificates, which are usually made transferable in the same manner as stock. The duties of the trustee are fixed by the trust agreement. Four cases involving such agreements have recently come before the Courts of New Jersey.

The first case (Cone v. Russell, 48 N. J. Eq., 208) was decided in 1891. There the agreement was held to be void because the objects intended to be derived from the agreement were bad as against public policy and the carrying out of which also involved a breach of trust by one of the parties. It was not held that a voting trust was in itself void as against public policy. Vice-Chancellor Pitney said: " This conclusion [that the "contract was void as against public policy] does not reach so far as to necessarily forbid all pooling or combining of stock, where the object is "to carry out a particular policy with the view to promote the best inter"ests of all the stockholders. The propriety of the objects validates the " means and must affirmatively appear." (Id., p. 215.)

In the second case (White v. Thomas Inflatable Tire Co., 52 N. J. Eq., 178), decided in 1893, the agreement was declared to be invalid because it did not by its terms extend to certain shares of the company issued after the execution of the agreement directly to persons who were not parties to the agreement.

It was held to be immaterial whether they had or had not notice of the trust agreement.

"As such holders they were entitled to have the other shares of stock "in the company stand upon an equal footing," and they were deprived of all voice in the management of the company. The issuing of the stock' was, therefore, held to be "a waiver and abandonment by the directors "who united in issuing it, of their rights under the contract in question."

The question again came before the Court of Chancery in the case of Kreissl v. Distilling Company of America, 47 Atl. Rep., 471, in which Chancellor Magie stated the principle as follows:

"Under the statutes permitting stockholders to give proxies and under the doctrine of the cases in this court to which I have referred, I conceive it is impossible to maintain that a proxy which confides to the attorney thereunder the power to exercise his judgment in certain cases, and so separates the voting power from the ownership of the stock, is void, per se. The principal may, doubtless, limit the power conferred to voting on certain questions and in a certain way. But if, as is customary, the power is unlimited, it must be exercised by the judgment and determination of the attorney on any questions which may be presented.

"The power of revocation is deemed sufficient to protect the rights of other stockholders. If, however, the stockholder undertakes to make irrevocable his grant of power and to denude himself for a fixed period of the power to judge and determine and vote as to the proper management and control of the affairs of the corporation, then whether the grant of power is good or not must depend on the purposes for which it is given.

"When the scheme devised does not embrace a grant of irrevocable powers by proxy, but seeks a similar object by the creation of a trust and

the appointment of a trustee, to whom the title of the stock is conveyed, § 36 a like doctrine must be applied. If no provision is made for the conduct of the trustee, at least he would be bound to vote on the stock held in trust in accordance with the expressed wishes of the cestui que trust; but if the transfer of the legal title to the stock is made and accepted under an agreement of the stockholder which deprives him of all power to direct the trustee, and all opportunity to exercise his own judgment in respect to the management of the affairs of the corporation, then whether the transaction is open to the objection of other stockholders, as depriving them of the right they have to the aid of their co-stockholders, must be dependent upon the purposes for which the trust was created, and the powers that were conferred.

"If stockholders, upon consideration, determine and adjudge that a certain plan for conducting and managing the affairs of the corporation is judicious and advisable, I have no doubt that they may, by powers of attorney, or the creation of a trust, or the conveyance to a trustee of their stock, so combine or pool their stock as to provide for the carrying out of the plan so determined upon. But if stockholders combine by either mode to entrust and confide to others the formulation and execution of a plan for the management of the affairs of the corporation, and exclude themselves by acts made and attempted to be made irrevocable for a fixed period, from the exercise of judgment thereon, or if they reserve to themselves any benefit to be derived from such a plan to the exclusion of other stockholders who do not come into the combination, then, in my judgment, such combination and the acts done to effectuate it, are contrary to public policy, and other stockholders have a right to the interposition of a court of equity to prevent its being put into operation."

The agreement in that case was held invalid because it provided for the absolute management and control of the company during a fixed period of time by the judgment and determination of the voting trustees, and because by its terms stockholders who did not enter into it were expressly declared to be entitled to no benefits under it.

The Court of Errors and Appeals in the case of Chapman v. Bates, 47 Atl. Rep., 638, said:

"We recognize the principle laid down in Cone v. Russell, 3 Dick., 208, and White v. Thomas Tire Co., 7 Dick., 179, that every stockholder is entitled to the benefit of the judgment of every other stockholder in the management of the affairs of the corporation, but in this case complaint is not made by one claiming that injury has been done to his interest by reason of a stockholder divesting himself of control of his stock, but by one of the very parties who has entered into this agreement and to which his consent has been given. He cannot complain of the injury done to his interests by this action for he is a consenting party. Such arrangements, with regard to the control of stock as contemplated in this proxy and power of attorney, and which have been denominated pooling agreements, are not necessarily void as being against public policy. In the case of Cone v. Russell, 3 Dick., 208, the Court, while holding the agreement in that case void as against public policy, expressly holds that

§37 this conclusion does not reach so far as to necessarily forbid all pooling

or combining of stock where the object is to carry out a particular policy with a view to promote the best interest of all the stockholders. The propriety of the object validates the means and must affirmatively appear.

"The following are cases in which pooling agreements have been held valid: Brown v. Pacific Mail Steamship Co., 5 Blatch., 545; Smith v. San Francisco & N. R. R. Co., 115 Cal., 584; s. c., 35 L. R. A., 309; Mobile & Ohio R. R. Co. v. Nicholas, 96 Ala., 92; Hey v. Dolphin, 92 Hun, 230.

"No illegal purpose is manifest upon the face of this agreement, nor has any been alleged in the bill. It appears to be consistent with the purposes for which the company was created, and whose continuance appears to be necessary for the advantage of all who are interested in the development of the property; it is expressly declared to be for the benefit of all who join in it. No stockholder is prevented from joining in this agreement, and no stockholder who has not availed himself of the opportunity to join in it is excluded from the benefit of it; no one appears to have been injured by it. The complainant does not allege in what way he is damaged by its continuance; he with about four hundred out of five hundred stockholders executed it, and he alone of all the stockholders asks to have it revoked. We do not think he should be allowed to revoke it."

Voting qualification of stockholders.—To enable a person to vote as a stockholder, it is not necessary that he have a certificate of stock. The effect of a certificate of stock is considered at page 37, ante. A subscriber for stock is a stockholder, even though he has paid nothing on his stock, and as such he is entitled to vote. It is necessary, however, that he should be a stockholder of record on the books of the company, whether such books be the original books of subscription, if any, or books containing the original entries of such subscription. In cases of dispute the transfer book must control. (Section 40. Downing v. Potts, 23 N. J. Law, 66; Storage Co. v. Assessors, 56 N. J. Law, 389.)

The fact that a stockholder is indebted to the company on his subscription does not impair his right to vote. (Savage v. Ball, 17 N. J. Eq., 142; Downing v. Potts, 23 N. J. Law, 66.)

37. Voting powers of executors and trustees. Hypothecated stock.

Every person holding stock as executor, administrator, guardian or trustee, or in any other representative or fiduciary capacity, may represent the same at all meetings of the corporation, and may vote thereon as a stockholder, and every person who shall pledge his stock as collateral security may, nevertheless, represent the same at all such meetings, and may vote thereon as a stockholder, unless in the transfer to the pledgee on the books of the corporation he shall have expressly empowered the pledgee

to vote thereon, in which case only the pledgee or his proxy may § 38 represent said stock and vote thereon.

P. L. 1846, p. 72; P. L. 1849, p. 308; Act of 1875, §§ 39, 40.

A formal transfer of stock on the books of the company is not necessary to enable an executor, administrator, etc., to vote. The corporation books are evidence of the ownership of the stock by the testator or intestate, and this section gives to the executor or other representative virtute officii the right to vote thereon in his representative capacity. (In re Election of Cape May, &c., Nav. Co., 51 N. J. Law, 78.)

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This right is held to extend to foreign executors. "An executor taking "title under a grant of letters of probate at the testator's domicile is the 'holder of stock belonging to his testator within the meaning of this sec"tion, and is entitled to vote thereon as such." The letters testamentary issued by the foreign court were held to be conclusive proof of the executor's title to the stock, and of his right to vote in respect thereof. (In re Election of Cape May, &c., Nav. Co., 51 N. J. Law, 78.)

One who lends money on the pledge of stock held in trust, will be held to have had notice that the trustee was abusing his trust and applying the money lent to his own purposes, when the certificates of the stock pledged show on their face that the stock pledged is held in trust (though the name of the cestui que trust does not appear), and when the loan was apparently for the private purposes of the borrower, and that fact would have been revealed by inquiry. (Gaston v. American Exc. Natl. Bank, 29 N. J. Eq., 98.)

38. Shares of stock of a corporation belonging to said corporation shall not be voted upon directly or indirectly.

P. L. 1825, p. 82; R. S. (Ed. of 1846), p. 139, § 6; Act of 1875, § 43. Power of corporation to purchase its own stock.-Under the Corporation Act there is an implied grant of power to corporations to purchase shares of their own capital stock whenever such purchase is required for legiti-' mate corporate purposes. Defendant employed plaintiff as bookkeeper, and it was agreed that he should purchase $800 worth of stock of the company, which, when he severed his connection with the company as bookkeeper, should be repurchased by it. After a few months the company came under the control of new stockholders, who ordered plaintiff to do work which he declared was not according to agreement. The company refusing to accede to his views he quit and demanded that they buy the stock he had bought. The company declined. The plaintiff brought suit to compel them to do this, and for damages. The defendant corporation pleaded ultra vires. The Supreme Court decided that the contract was within the power of the corporation, and that the plea of ultra vires was inadmissible. (Chapman v. Ironclad Rheostat Co., Atl. Rep., 690.)

41

The company may not vote upon such shares either directly or indirectly.— (McNeely v. Woodruff, 13 N. J. Law, 352, 360; Matter of St. Lawrence Steamboat Co., 44 N. J. Law, 529, 539; see also Hilles v. Parrish, 14 N. J. Eq., 380.) This includes all stock standing in the name of an officer, a trustee, or in the name of any person, if the stock is the property of the company.

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A corporation has no lien on its stock held by its debtor. (D., L. & W. R. R. Co. v. Oxford Iron Co., 38 N. J. Eq., 340, and cases cited.) Except, perhaps, where there is a provision in the certificate of incorporation giving the company a lien. (Drexel v. Long Branch Gas Co., 3 N. J. L. J., 250.)

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No person shall be elected a director of any corporation issuing stock unless he shall be, at the time of his election, a bona fide holder of some of the stock thereof; and any director ceasing to be a bona fide holder of some of the stock thereof, shall cease to be a director; any corporation may, by its certificate of incorporation or by-laws, determine how many shares a person shall hold to qualify him to be a director.

Act of 1875, SS 47, 48.

Under a similar provision of the English law, it has been held that the election of a person not already holding stock is invalid, and that the subsequent acquisition of stock does not render his election valid or qualify him to act as a director.

(Barton's Case, 5 Ch. D., 963; Jenner's Case, 7 Ch. D., 132.)

It was held in an Oregon case that, "a bona fide owner of shares of "stock is eligible as a director, although the transfer of his shares to him "has not been registered, and although he might, for that reason, be re"fused permission to vote or to receive dividends." (State v. Smith, 15 Or., 98.)

(See also 3 Thompson on Corporations, Section 3860.)

"The question of the competency of a person for the directorship is "one exclusively of judicial cognizance over which the inspectors of "election have no jurisdiction. * * * A stockholder may have purchased stock with a view of becoming a director, or have ob"tained it by gift, or he may hold it upon a trust, and be qualified to be "a director. If the stock was legally issued, and is not the property of "the corporation, and the legal title is in him, he is prima facie capable "of being a director, and his right to be a director in virtue of his legal "title to such stock can be impeached only by showing that title was "put in him colorably with a view to qualify him to be a director for some "dishonest purpose, in furtherance of some fraudulent scheme touching "the organization or control of the company, or to carry into effect some "fraudulent arrangement with the company." (Matter of Election of St. Lawrence Steamboat Co., 44 N. J. Law, 529, 540-1; see also In re Leslie, 58 N. J. Law, 609, 618.)

The Supreme Court held that where one is made a director of a corporation solely to make up the number of directors required by law, his right to hold such office cannot be impeached for fraud at the instance of one who was a consenting party to his admission into the company and his election to the office. (In re Leslie, 58 N. J. Law, 609, 618.)

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