Story Case

The United Electric Company was a corporation, engaged in the business of manufacturing and selling electricity for lighting and other purposes. It built a new plant, and sold the old one to the Peoples Surface Railway Company; this company did not pay for the plant at once and the deal was not closed for several years. The stockholders of the United Electric Company grew impatient by the delay. At length, some of the stockholders demanded of the directors that an action be started at once against the Peoples Surface Railway Company for the recovery of this money. The directors promised to do this but did not. The stockholders feared that further delay might bar the right to recover on the right of action, and they proceeded on their own initiative to file a bill in equity, joining the corporation, directors, and the parties to whom the property was sold. They asked that the court of equity compel the directors to proceed to sue on this right of action. It was contended by the directors that the corporation, as ruled by the directors, had the sole right to choose, whether an action should be started. Should the directors win their contention!

Ruling Court Case. Hawes Vs. Oakland, Volume 104 United States Reports, Page 450

The Contre Costa Water Works Company was incorporated under the laws of the state of California for the purpose of maintaining and operating a water plant in the city of Oakland, California. The corporation agreed with the city of Oakland, in return for the use of the city streets, to permit the city to receive water free of charge in case of fire or in other cases of emergency. Hawes, who is a stockholder of the company living in New York, now makes complaint that the corporation is furnishing water to the city free of charge for all municipal purposes. He states that he has remonstrated with the directors and officers of the corporation about the matter, and that they persistently refuse to act, but continue to furnish the water freely to the city. He claims that this greatly reduces the profit which the corporation might otherwise make. He, thereupon, brings this action against the city of Oakland, and joins the directors of the corporation. He asks that they be enjoined from the continual abuse of the corporation, of which he is a member.

On behalf of the city of Oakland it was contended that an individual stockholder cannot bring this action; that it is a matter for the corporation, and the corporation alone. So long as the corporation does not complain, it follows that the several stockholders cannot complain.

Decision

As a general rule, all rights of actions, all causes of complaint, which enure to the benefit of the corporation, must be taken up by the corporation itself. It is no part of the right of an individual shareholder to bring actions in this regard in his own name. However, if the board of directors of the corporation, or managers, are abusing their power, or acting for their own interest, or dealing with the corporation unfairly or in a fraudulent manner, then an individual stockholder may institute an action to prevent such abuses, if the directors will not. However, it was not shown in this case that the giving of free water to the city was an abuse of the powers of the corporation. On the other hand, the Court was of the opinion that it was a matter of policy for the corporation.

Mr. Justice Miller delivered the following opinion:

"We understand that the doctrine to be that, to enable a stockholder in a corporation to sustain in a Court of Equity in his own name, a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff, there must exist as the foundation of the suit "Some action or threatened action of the managing board of directors or trustees of the corporation which is beyond the authority conferred on them by their charter or other source of organization;

"Or such a fraudulent transaction completed or contemplated by the acting managers, in connection with some other party, or among themselves, or with other shareholders as will result in serious injury to the corporation, or to the interests of the other shareholders;

"Or where the board of directors, or a majority of them, are acting for their own interests, in a manner destructive of the corporation itself, or of the rights of the other shareholders;

"Or where the majority of the shareholders themselves are oppressively and illegally pursuing a course in the name of the corporation, which is in violation of the rights of the other shareholders, and which can only be restrained by the aid of a Court of Equity.

"Needless to say that the bill herein presents no such case as we have here supposed to be necessary to the jurisdiction of the Court."

Accordingly, judgment was given for the city of Oakland.

Ruling Law. Story Case Answer

The directors of a corporation, as a general rule, owe no duty to the shareholders as such. Yet the shareholders are greatly interested in the success of the corporation. If, then, the corporation has valid outstanding claims, which the directors will not enforce, or if invalid claims are being enforced against the corporation, which the directors will not resist, what is the remedy of the stockholders, who are interested in having valid claims enforced, and invalid claims resisted? It is generally held that the shareholders may go into a Court of Equity and compel the directors to sue or defend as the case may be. In order that shareholders may have this right to go into equity, they must first show that they have called upon the directors to take the necessary steps, and that the directors, without any valid reasons, have refused to do so. In the Story Case, the corporation had a valid claim against the parties to whom the property was sold. The shareholders had requested the directors to begin an action thereon. The directors, arbitrarily and without reason, refused or neglected to do so. Consequently, the shareholders are entitled to have equity compel the directors to take the necessary steps to enforce this claim.