Steinfeld v. Nielsen

ROSS, J.

The appellant Steinfeld, although not an officer or director of the Nielsen Mining & Smelting Company, also known as the Silver Bell Copper Company, dominated the •company and dictated its business policy. His controlling and dominating influence and power over the business affairs of the mining company arose out of the fact that L. Zeekendorf •& Co., of Avhich he was the managing partner, and he owned and controlled a majority of the company’s stock and were represented on the board of directors by two of L. Zecken *444 dorf & Co.’s employees, who were a majority of the hoard, and the further fact that the mining company was largely indebted to L. Zeckendorf & Co. for moneys and merchandise furnished it and to be furnished it in the progress of development and operation. For these reasons Steinfeld’s domination of the mining company was absolute. His will in the business affairs and the policies of the mining company was felt and followed. By refusing credit, he could stop operations. By legal proceedings to collect what was owing L. Zeckendorf & Co., he could take from the mining company most, if not all, of its assets, and by the exercise of his power over the board of directors he was regnant in its internal affairs.

Possessing such unlimited power over the mining company, he ought to be held to owe the same standard of conduct toward the stockholders of the company as is due from an officer or director. The general rule is that an officer or director may purchase the stock of his company from stockholders with the same freedom as a stranger, and, in so doing, the fact that he may be possessed of inside information as to the future plans and policies of his company is not permitted to militate against him, “and, so long as he remains silent and does not actively mislead the person with whom he deals, the transaction cannot be set aside for fraud.” Cook on Corporations, 5th ed., see. 320, p. 707; Crowell v. Jackson, 53 N. J. L. 656, 23 Atl. 426; Rothschild v. Memphis & Charleston R. R. Co., 113 Fed. 476, 51 C. C. A. 310; Gillet v. Bowen (C. C.), 23 Fed. 626; Walsh v. Goulden, 130 Mich. 531, 90 N. W. 406; Board of Commrs. v. Reynolds, 44 Ind. 509, 15 Am. Rep. 245; Haarstick v. Fox, 9 Utah, 110, 33 Pac. 251; Deaderick v. Wilson, 67 Tenn. (8 Baxt.) 108; 2 Story’s Eq., see. 1564; 4 Thompson on Corporations, 2d ed., sec. 4031. This rule has been applied by the courts and text-writers where the bare relation of the officer of the corporation and the stockholder was involved. But “if it were conceded, for the purpose of the argument, that the ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder, *445 yet there are cases where, by reason of the special facts, such duty exists. The supreme courts of Kansas and of Georgia have held the relationship existed in the cases before those courts because of the special facts which took them out of the general rule, and that under these facts the director could not purchase from the shareholder his shares without informing him of the facts which affected their value. Stewart v. Harris, 69 Kan. 498, 77 Pac. 277 [105 Am. St. Rep. 178, 2 Ann. Cas. 873, 66 L. R. A. 261]; Oliver v. Oliver, 118 Ga. 362, 45 S. E. 232. The case before us is of the same general character.” Strong v. Repide, 213 U. S. 419, 431, 53 L. Ed. 853, 29 Sup. Ct. Rep. 521, 525.

“The special facts” referred to that took the StrongRepide case out of the general rule, succinctly stated, were: That Repide was a majority stockholder and director of a corporation owning some friar lands in the Philippine Islands. “He was not only a director, but he owned three-fourths of the shares of its stock, and was, at the time of the purchase of the stock, administrator general of the company, with large powers, and engaged in the negotiations which finally led to the sale of the company’s lands (together with all the other friar lands) to the government at a price which very greatly enhanced the value of the stock. He was the chief negotiator for the sale of the lands and was acting substantially as the agent of the shareholders of this company by reason of his ownership of the shares of stock in the corporation and by the acquiescence of all the other shareholders, and the negotiations were for the sale of the whole of the property of the company. By reason of such ownership and agency, and his participation as such owner and agent in the negotiations then going on, no one knew as well as he the exact condition of such negotiations. No one knew as well as he the probability of the sale of the lands to the government. No one knew as well as he the probable price that might be obtained, on such sale.” At the time Repide bought the Strong stock negotiations for the sale of the company’s lands were pending, and these negotiations were entirely in his hands, and a failure on his part to disclose these facts, the court held, amounted to fraud and deceit. We would be bound by that case if the facts in this case were the same. In that case Strong was not an officer of the company and *446 had no part in its management, and the sale to the government was entirely in Repide’s charge and pending at the time he bought the Strong shares. Nielsen was not only a' stockholder in the Nielsen Mining & Smelting Company, but was. also a director. He was also the superintendent of the mines and smelter. In his official capacity he had a most intimate knowledge of the value of the mines and of the operation and production of the smelter. He knew, or should have known, the indebtedness of his company. He knew at the time of the shut-down that Steinfeld had already purchased the interest of some of the English claimants in the adjoining mining claims, and that he intended acquiring the title to all of the English group of claims. He was in possession of all of these facts on June 29, 1900, the date he entered into the contract with Steinfeld, selling his stock.

The property of the company was sold through the efforts of Steinfeld on May 20, 1903, to the Imperial Copper Company; no sale to this company nor anyone else was pending at the time Steinfeld bought the Nielsen stock, nor at the time of the shut-down. Nielsen knew that Steinfeld had been trying to sell, and that it was his purpose to sell if a purchaser could be found. Steinfeld’s letter of January 3, 1900, and the contract of sale to Steinfeld apprised Nielsen of Steinfeld’s purpose to sell. Under these circumstances, there were no “special facts” known to Steinfeld that were not also known to Nielsen.

The operation of the mines and smelter was suspended by Steinfeld confessedly for two reasons: (1) To acquire title to the English group of mining claims, of which purpose Nielsen had knowledge; and (2) to acquire the Nielsen stock and thereby dispense with his services as superintendent of the mines. At the time of the shut-down, all of Nielsen’s means consisted of his interest in this corporation. The corporation was heavily in debt, owing about $70,000. The debt, at the date of the organization of the Nielsen Mining & Smelting Company, was less than $23,000. Part of the increased indebtedness is accounted for in improvements on the mines and smelter and the payment of $10,000 on the optional contract of purchase of the Old Boot Mine.

In view of all these circumstances, or in any ease, can it be said that Steinfeld was guilty of fraud or coercion, as *447 alleged in the complaint, in suspending the work at the mine for the purpose of acquiring the Nielsen stock and getting rid of the Nielsens, for the evidence shows that, if there was fraud or coercion, it consisted in that one act, emphasized by the statement of Steinfeld to Nielsen that, if he did not take the offer of Steinfeld, he would get nothing for his stock. This last statement, construed under the condition in which it was made, was not necessarily a threat, for it was a fact that the corporation was largely indebted and liable to be sued and its assets taken by creditors; and it was without means to meet the payments on its optional contract to purchase the mines, and a failure to make such payments subjected its principal asset—the mines—to be forfeited as well, also, as all previous payments. The embarrassing and precarious situation of financial inability to meet obligations due and coming due was not the creation of Steinfeld. It arose from an effort on the part of the corporation to acquire, develop and operate the mines—the very object of its creation. Steinfeld, through Zeckendorf & Co. by suit, could have taken the mines for the debt owing the latter without violating any duty he owed Nielsen, or he had it in his power to carry the Zeckendorf account, pay the installments on the purchase price of the mines, purchase the English group of mines, and negotiate a sale of the consolidated property, leaving the Nielsen stock as Nielsen’s, entitled to dividends on the whole selling price.

This the appellee claims was his duty. We do not believe that his duty to Nielsen required that he should use his personal credit and financial standing to augment the mining company’s resources or to pay its debts or to extend its credit.

The facts in Perry v. Pearson et al., 135 Ill. 218, 235, 25 N. E. 636, 641, are in many respects similar to the facts of this ease, and we quote from it language which we think applies here with especial force: “It is claimed that appellees made statements to Perry himself which had the effect of discouraging him and exciting his fears as to the future of the company. It was impossible for them to tell him anything about the company or its affairs or its prospects, which he did not know. The pecuniary liabilities of the company pressed as heavily upon them as upon him. If, when they stated the truth to him, he became depressed thereby, we can *448 not see that they are to blame. It is urged, however, that, by reason of the fact that Perry and the Pearsons were eostoekholders and codirectors in the company, there were confidential relations between them, such as exist between a trustee and cestui que trust, and that therefore appellant, as the cestui que trust, has the option to set the sale aside independently of the question whether it was fraudulent in fact or not. It is true that, in a certain sense, the directors of a corporation occupy the position of trustees toward the stockholders. As the value of the shares of the stockholders and their rights in connection therewith are affected by the conduct of the directors, a trust relation is created between them. The directors owe a fiduciary duty toward the stockholders in dealings which may affect the stock. 3 Pomeroy’s Equity Jurisprudence, sec. 1090. It would certainly be most inequitable to permit the directors of a corporation to so manage its business, or to so deal with its property, as to lessen the value of its stock for the purpose of purchasing such stock for themselves at a low figure. But in the present case the appellant was more than an ordinary stockholder; he was not only the owner of a majority of the stock, but was himself a director and the president of the corporation, intrusted with the control and direction of its business.”

It is complained that the price paid by Steinfeld for the Nielsen stock was inequitable and inadequate. Nielsen and Bewis were the owners of two unpatented mining claims located near or adjoining the Old Boot Mine, and Nielsen owned 300 shares of the Nielsen Mining & Smelting Company .•stock. Steinfeld would not buy the mines unless he could buy the stock; nor would he buy the stock without the mines. "While separate instruments were executed evidencing the sale of the mines and the stock, they were in fact but one transaction; and the consideration for the conveyances to Steinfeld was $2,000 cash at the date of sale, and the agreement to pay Nielsen $10,000 additional if realized from the net operations ■of the mine or upon a sale of the company’s property. The pecuniary liabilities of the company were heavy; the Old Boot Mine, its principal resource, was held under an optional sale .and liable to be forfeited for failure to make its payments of installments on the purchase price when due; and the -company was without.money or credit.

*449 The trial court refused to find the value of the Nielsen stock at the time work was suspended at the mine or at the time that Steinfeld bought it. There was no proof in the case whatever showing that the stock had any value other than a speculative value. No dividends had been paid, and the company owed more when it ceased operations than when it began. After the operations were closed down in February, 1900, not a furnace was fired or a pound of ore produced. Steinfeld evidently concluded that the property would realize more from a sale than from operation, which is not infrequently the case. What might be realized in a sale of the property was, of course, problematical.

Steinfeld offered $2,000 cash and the above agreement, and, in view of the involved financial condition of the company, we cannot say that he was paying too little for what he got. Again we quote from Perry v. Pearson et al., supra (135 Ill. at pages 230, 228, 25 N. E. at pages 639, 638):

“But let it be admitted that appellant’s stock was sold for much less than it was worth. He made the sale with his eyes open. He seemed to be willing to part with his stock at a low figure rather than run the risk of being held liable for the debts of the company. No misrepresentations were made to him. He was well acquainted with the value of what he was selling, as were those who purchased from him. Whenever it appears that the parties knowingly and deliberately fixed upon any price, however great or however small, there is no occasion nor any reason for interference by courts, for owners have a right to sell property for what they please, and buyers have a right to pay what they please. 2 Pomeroy’s Equity Jurisprudence, see. 927, noté ‘ e, ’ and eases cited. ’ ’

“Mere inadequacy of price, unaccompanied by other inequitable incidents, will not justify a court of equity in setting aside a sale or contract. The cancellation will only be decreed where the inadequacy of price is so gross that it shocks the conscience and furnishes satisfactory and decisive evidence of fraud. 2 Pomeroy’s Equity Jurisprudence, secs. 927 and 928." Graffam v. Burgess, 117 U. S. 180, 29 L. Ed. 839, 6 Sup. Ct. Rep. 686; 9 Cyc. 367.

At the time that Steinfeld purchased the Nielsen stock, the assets of the Nielsen Mining & Smelting Company consisted of the Old Boot Mine and the machinery and equipment *450 thereon. Subsequently Steinfeld, with his own means, purchased the English group of claims and in May, 1903, nearly three years after he had bought the Nielsen stock, sold the consolidated groups to the Imperial Copper Company for $515,000. Doubtless the added mining claims had the effect of increasing the value of the Nielsen stock. However, the amount received for a much enlarged property, sold some three years after and when the situation was materially changed, is no test or measure of the value of the Nielsen stock in June, 1900. If Steinfeld’s venture and risk had proved a failure, the loss would not have been suffered by Nielsen. The venture or speculation having been successfully floated by Steinfeld’s energy and at his risk, we think he is entitled to the fruits of his labor. It may be a fact that the Nielsens executed the contract to Steinfeld largely because of their straitened circumstances. This is not an anomalous condition of contracting parties. Indeed, in a large proportion of the transactions involving transfers of title in property, one of the parties is acting from pecuniary necessity. If the Nielsens were poor and hard pressed in money matters, it is not shown that Steinfeld contributed to it or that he was responsible for it. They yielded to the pressure of their situation and freely and voluntarily signed the contract of sale. ‘ ‘ Such an act as that of signing those instruments, under the circumstances disclosed in the record, must be regarded, both in equity and at law, as a voluntary act, as it was unattended by any act of violence or threat of any kind calculated in any degree to intimidate the party or to force the result, or to compel that consent which is the essence of every valid contract.” French v. Shoemaker, 14 Wall. 315, 20 L. Ed. 852.

The discharge of Nielsen as superintendent, whether by the mining company or by Steinfeld, is not shown to have been violative of any rights of Nielsen. Nor is it evident that by reason thereof he was in the least influenced to execute the contract of sale with' Steinfeld. Nor is it shown that his financial distress was more acute by reason of his discharge. Had the operations at the mine shown dividends or increase of value in the company’s assets, or had the company been able within itself to carry on development and operations, the appellee’s complaint that Nielsen was discharged as superintendent for the purpose of acquiring his stock might be *451 justified and form the basis for equitable relief, especially if its effect was injurious to Nielsen. But, under the circumstances as they existed, no injury is shown. The fact that Steinfeld entertained the secret purpose of acquiring the Nielsen stock and thought that Nielsen’s discharge might facilitate his purpose could not have influenced Nielsen’s subsequent conduct in executing the contract of sale to Steinfeld. Undisclosed purposes and intentions as to future conduct or action of Steinfeld were not matters that Nielsen was entitled to know. The facts, as they existed at the time of the transactions, were within Nielsen’s knowledge. He was fully advised, and if he made a poor bargain, of which we are not convinced in view of all the circumstances at the time, he cannot now complain.

We think the trial court committed error in decreeing a rescission of the contract of June 29, 1900, and giving judgment in favor of the plaintiff for the 300 shares of stock, together with dividends thereon.

That judgment is reversed and the cause is remanded, with directions that judgment be entered for the defendant.