to the transfer if the corporation is a going and prosperous concern, although as to this there is some doubt, at least where transfers by a majority or a certain per cent of the stock are authorized by statute; 65 that the transfer may be made for stock in the new company if provision is made for paying dissenting stockholders 66 the value of 4 See Elyton Land Co. v. Dowdell, 113 Ala. 177, 59 Am. St. Rep. 105, 20 So. 981; Parish v. Cieneguita Copper Co., 12 Ariz. 235, 100 Pac. 781. C3 Where a statute authorized a majority of the stockholders to dissolve a corporation and sell its assets, although it did not provide for a consolidation, and several corporations, all of which were without credit and in need of capital, ordered a sale of their assets and a dissolution, and on such sale the majority stockholders bought in the property and assigned their bids to a corporation which they had organized and which was to issue certificates of indebtedness to pay the debts of the old companies and for a working capital, and was to exchange its own stock for the stock of the old companies, minority stockholders cannot set aside the sale where they had an opportunity to bid at the sale and where there was no fraud or bad faith; but on appeal it was held that if the purchase was by directors for a new corporation organized by them, the sale should be set aside where the bid was less than the value of the property. J. H. Lane & Co. v. Maple Cotton Mill, 232 Fed. 421, rev'g 226 Fed. 692. The New York statute authorizing two-thirds of the stock to sell its property to a domestic corporation "engaged in a business of the same general character' authorizes a sale by one company to a new company organized to take over the property of the old company, even against the objection of minority stockholders, where authorized by at least two thirds of the stock, where the majority act in good faith. Hinds v. Fishkill & M. Equitable Gas Co., 96 N. Y. App. Div. 14, 16, 88 N. Y. Supp. 954. For New York statute as to voluntary sale of franchises and property, see Stock Corporation Law, §§ 16, 17, the latter section declaring the rights of nonconsenting stockholders to an appraisal of the value of their stock and payment for it in case of such a sale. In Illinois, one way, it seems, to get rid of an obnoxious stockholder, is to voluntarily dissolve the old corporation pursuant to a statute authorizing it on a vote of a certain per cent of the stock, and then have the other stockholders reorganize, the ousted stockholder being paid his share of the corporate assets. See First Nat. Bank of Centralia v. Marshall, 26 Ill. App. 440. But statutory authority to dissolve the corporation on a majority vote of the stockholders does not include authority to reorganize by a majority vote. Farish v. Cieneguita Copper Co., 12 Ariz. 235, 100 Pac. 781. 66 See McLeod v. Lincoln Medical College of Cotner University, 69 Neb. 550, 98 N. W. 672, 96 N. W. 265. In equity at least, a minority stockholder who owns only a very small part of the stock will not be granted relief against a voluntary reorganization of the corporation, where there has been no fraud or mismanagement and he is offered his share of stock in the new company or the cash value of his stock, and to grant the relief their shares, but not otherwise; 67 and that a sale to a reorganized company after the charter has expired, when in good faith, cannot ordinarily be enjoined by minority stockholders.68 So, since majority stockholders cannot compel dissenting stockholders to accept stock in the new corporation, they cannot, of course, impose arbitrary and unfair terms and conditions upon them for refusing to do so.69 A corporation cannot, as against the objection of minority stockholders, create a new corporation in which the old company is to be the only stockholder with only the capital that the old corporation would inflict great injury on innocent parties. Treadwell v. United Verde Copper Co., 134 N. Y. App. Div. 394, 119 N. Y. Supp. 112. A dissenting stockholder cannot have a reorganization set aside and & new sale ordered, where he owns a very small part of the stock and all the other stockholders have consented thereto, and there is no evidence of fraud or bad faith, but he should be limited either to receiving shares in the new company or to a recovery of the value of his stock. Treadwell v. United Verde Copper Co., 134 N. Y. App. Div. 394, 119 N. Y. Supp. 112. Minority stockholders cannot be put on an equal footing with stockholders of the new company who had contributed large sums to finance the new company, but instead their rights ordinarily are limited to a recovery from the new company of the value of their stock in the old company. Gresham v. Island City Sav. Bank, 2 Tex. Civ. App. 52, 21 S. W. 556. 67 Minority stockholders who do not consent thereto cannot be compelled to accept stock in the new corporation as agreed upon by the majority stockholders. People v. Ballard, 134 N. Y. 269, 17 L. R. A. 737, 32 N. E. 54. If the reorganization is a voluntary one and not in connection with any forced sale, the majority stockholders cannot force minority stockholders into the new organization nor can they take away the legal rights of the mi nority stockholders to their stock in the old corporation. Gresham v. Island City Sav. Bank, 2 Tex. Civ. App. 52, 21 S. W. 556. 68 A minority stockholder cannot enjoin the sale of the corporate property to a new and reorganized company, after the charter of the old company has expired, where there has been no fraud or bad faith and such minority stockholders are not frozen out or discriminated against by the reorganization plans. Nowak v. National Car Coupler Co., 260 Ill. 260, 103 N. E. 222. 69 In disposing of the property of a corporation and winding up its affairs after expiration of its charter, under a statute continuing its existence for such purpose, neither the directors nor a majority of the stockholders can sell the property to a new corporation, of which they are directors and stockholders, on an arbitrary estimate of its value made by themselves, and compel a dissenting minority of the stockholders either to take shares in the new corporation in exchange for their shares in the old, or to accept payment of their proportion in money on the basis of the estimated and arbitrary valuation fixed by such majority. Mason v. Pewabic Min. Co., 133 U. S. 50, 58, 33 L. Ed. 524. See also Godley v. Crandall & Godley Co., 212 N. Y. 121, 135, L. R. A. 1915 D 632, 105 N. E. 818. had before, especially where the purpose thereof is to increase the capital stock of the old company without complying with the provisions of the statute governing the subject.70 In one case, where property was in the hands of a receiver and part of the stockholders desired to reorganize the corporation, the court submitted the question as to the reorganization to the stockholders, and on their favoring it by a large majority the receiver was discharged and the property turned over to the stockholders.71 Where the stock of an expiring corporation is merged into the stock of a new one, organized as its successor, acquiring its franchises and assuming its obligations, a provision inserted in the charter of the new company, forfeiting dividends not claimed, within three years from the time when they are declared, is not binding upon the old stockholders, except from the time when, expressly or by implication, they consent thereto by assuming the quality of stockholders in the new company. An old stockholder who has been ignorant of his rights and of the transfer, and who claims his dividends as soon as informed of their existence, cannot be affected by such provision except in the future.72 § 4866. Where transfer is not in good faith. Of course, no reorganization by majority stockholders can stand against attack where it is a fraud upon the rights of minority stockholders.73 Reorgani 70 Schwab v. E. G. Potter Co., 194 N. Y. 409, 87 N. E. 670, aff'g 129 N. Y. App. Div. 36, 113 N. Y. Supp. 439. 71 Tolman v. Ubero Plantation Co. 142 Fed. 270. 72 Armant v. New Orleans & C. R. Co., 41 La. Ann. 1020, 7 So. 35. 73 Hinds v. Fishkill & M. Equitable Gas Co., 96 N. Y. App. Div. 14, 88 N. Y. Supp. 954, where majority stockholders organized another corporation and then sold to it all the property of the old corporation at a grossly inadequate price. Representatives of minority stockholders who did not consent to a reorganization by the majority stockholders are not estopped to set up their rights in the property of the old corporation, where most of them were infants and where the adults had been deceived. Marsh v. Breen Iron Co., 181 Mich. 204, 148 N. W. 493. It is no answer to a suit by minority stockholders to enjoin a reorganization without foreclosure by majority stockholders to say that if any minority stockholder dissents from the plan of reorganization he may avail himself of the statutory remedy authorizing him to require an appraisal of his stock and be paid the amount of such appraisal, since such remedy "is not exclusive, so that a court of equity is restricted thereby in affording relief by the application of equitable principles, where there has been fraud or oppressive and unfair treatment of the minority in a sale or plan of reorganization proposed by the majority stockholders of a corporation" and it would be most unjust if a minority stockholder were compelled zations by a private sale are sometimes resorted to freeze out some of the stockholders by a purchase in behalf of the majority or conspiring stockholders for much less than the value of the corporate property, the application of such proceeds to the payment of the debts of the company, and then the organization of a new company to take over the property purchased, with the majority stockholders owning it all and the minority stockholders left out in the cold with nothing to show for their investment. Whatever the rule may be where the transaction is in good faith, there is no question but that minority stockholders are not bound by a reorganization by a voluntary transfer to majority stockholders where such stockholders act in bad faith 74 as where they purchase or take over the assets for a sum much less than their real value 75 or where they exclude the minority from a fair participation in the fruits of the sale; 76 and this is so although a transfer of the corporate assets is authorized by statute.77 Thus, the sale of the franchise and all the assets of a corporation, although it is insolvent, for the purpose of eliminating the interest. of a particular stockholder, is fraudulent and void as to him where authorized only at a secret meeting of the other stockholders of which he purposely was not given notice.78 And a reorganized company which had purchased the assets of the old company at a tax sale cannot assert the tax title as against minority stockholders who did not consent to the transfer and reorganization, where it was the duty of the officers of the original company to pay the taxes and such officers were the moving stockholders in effecting the reorganization.79 to accept an unfair and oppressive proposition made by the majority stockholders, or, in the event of his failure to accept it, be compelled to part with his stock and forego the opportunity to share in the future earnings of the corporation." MacArthur v. Port of Havana Docks Co., 247 Fed. 984, 987. 74 Mecker v. Winthrop Iron Co., 17 Fed. 48. 75 Ervin v. Oregon Ry. & Nav. Co., 27 Fed. 625; Hinds v. Fishkill & M. Equitable Gas Co., 96 N. Y. App. Div. 14, 88 N. Y. Supp. 954. Majority stockholders, or officers, of a corporation cannot ordinarily buy the assets of a corporation at private or judicial sale and reorganize a new company, without making the new VII Priv. Corp.-74 corporation liable to the creditors and minority stockholders of the old company for the fair value of the assets at the time of the sale. Sparrow v. Bement & Sons, 142 Mich. 441, 10 L. R. A. (N. S.) 725, 105 N. W. 881. 76 Ervin v. Oregon Ry. & Nav. Co., 27 Fed. 625. 77 If the corporate property is turned over for much less than its real value, the transfer is fraudulent so as to warrant relief in favor of the minority stockholders. Hinds v. Fishkill & M. Equitable Gas Co., 96 N. Y. App. Div. 14, 88 N. Y. Supp. 954. 78 Mulverhill v. Vicksburg Railroad Power & Manufacturing Co., 88 Miss. 689, 40 So. 647. 79 Marsh V. Breen Iron Co., 181 Mich. 204, 148 N. W. 493. A reorganization without foreclosure by majority stockholders whereby they will have a much larger percentage of the stock of the new company than they held in the old company, while the minority stockholders will have a much smaller percentage, will, it seems, be enjoined at the suit of minority stockholders.80 On the other hand, where a public sale would have resulted in obtaining a no larger price than a private sale, stockholders cannot object to a sale of the corporate property to majority stockholders because the sale was private rather than public.81 So a reorganization cannot be attacked by a holder of preferred stock on the ground that the holders of common stock in the old company may ultimately realize a profit out of the transaction, where they furnished the cash that was absolutely necessary to carry out the reorganization. And a sale, authorized by majority stockholders, to an officer acting for a new and reorganized company, is not for an inadequate price merely because a much larger sum had been offered in stock of the new company than the cash bid which was accepted.83 § 4867. Effect of reorganization. The effect of a reorganization of this kind, as distinguished from a reorganization in connection with a judicial or execution sale, so far as the rights of creditors of the old company are concerned, must always be kept in mind.8 The transfers and reorganizations independent of any judicial or execution sale do not deprive nonassenting bondholders or others having a lien upon the property of the right to enforce the same: nor do they prevent unsecured creditors from following the property into the hands of the transferee or holding the new company liable.85 The creditors cannot be compelled to accept a change of debtors against their will.86 § 4868. Limitations upon power of legislature to authorize reorganization without consent of minority stockholders or bondholders. In most of the states, if not in all, there are statutory provisions for the reorganization of corporations, and these provisions are binding, of course, except in so far as they may be in violation of 80 MacArthur v. Port of Havana Docks Co., 247 Fed. 984. 81 Rossing v. State Bank of Bode, Iowa, 165 N. W. 254. 82 Feker v. Kentucky Refining Co., 144 Ky. 264, 138 S. W. 264. 83 Nowak v. National Car Coupler Co., 206 III. 260, 103 N. E. 222. 84 See § 4984, infra. 86 Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N. W. 413. |