shall be entitled to receive when and as declared from the surplus or net profits of the corporation yearly dividends, at the rate of seven per centum per annum, and no more, payable quarterly on dates to be fixed by the by-laws." The by-laws of the company provide as follows: Article 5, § 5: "The dates for the declaration of dividends upon the preferred, and upon the common stock of the company shall be the days by these by-laws fixed for the regular monthly meetings of the board of directors in the months of April, July, October and January in each year, on which days the board of directors shall declare what, if any, dividends shall be declared upon the preferred stock and the common stock or either of such stocks. The dividends on the preferred stock shall be payable quarterly on the sixth Wednesday next after the several dates of the declaration thereof."

The board of directors of said corporation, having resolved that it would be advisable to decrease the capital stock of the corporation to the extent of 2,000,000 shares, and to retire them by means of an issue of bonds, called a meeting of the stockholders to be held on the 19th day of May, 1902, in pursuance of and as required by section 27 of the general corporation law and by the act of 1902, for the purpose of voting upon the proposed plan for the purchase and retirement of that amount of preferred stock and the issue of 5 per cent. bonds. Prior to the notice of this meeting the directors had entered into a tentative contract with Messrs. J. P. Morgan & Co., bankers, under date of April 1, 1902, by which said bankers agreed with the steel corporation that $100,000,000 face value of the new bonds would be taken and paid for, of which $80,000,000 would be paid for by a like amount of preferred stock taken at par, and $20,000,000 would be paid in cash. To guaranty the performance of this contract, a syndicate was formed by J. P. Morgan & Co., the members of which actually deposited with that firm $80,000,000 of preferred stock to be used in the performance of the contract. The effect and purport of this agreement is that the bankers agreed to buy from the steel corporation at least $100,000,000 of 5 per cent. bonds, and to pay therefor $20,000,000 in cash and $80,000,000 in preferred stock at par, with an option to purchase the remaining bonds if the stockholders did not do so; and in consideration of this undertaking the bankers were to receive a commission of 4 per cent. on $100,000,000, and contingently a commission of 4 per cent. on any additional amount that might be taken at par by the stockholders or the bankers. This contract with the bankers was to be subject to the approval of the stockholders. At the stockholders' meeting on the 19th of May, 1902, duly convened, the resolution to retire the preferred stock and the resolution to adopt the bankers' contract were separate and distinct, and were voted

upon and passed as separate and distinct resolutions. The shareholders could have adopted the first and rejected the latter. There was in attendance at the meeting in person or by proxy over 73 per cent. of the outstanding preferred stock, and over 78 per cent. of the outstanding common stock. More than 99.83 per cent. of the stockholders at such meeting, present either in person or by proxy, voted in favor of both resolutions, and only 17/100 of 1 per cent. voted against them.

The by-laws of the corporation contained the following provision: "The board of directors in its discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders, or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or ratified by the vote of the holders of a majority of the capital stock of the company which is represented in person or by proxy at such meeting: provided that a lawful quorum of stockholders be there represented in person or by proxy, shall be as valid and as binding upon the corporation and upon all the stockholders, as though it had been approved or ratified by every stockholder of the corporation." This by-law cannot amplify the powers of the corporation, or operate to validate any act ultra vires of the corporation, but it enabled the stockholders by a majority vote to ratify any contract which the entire body of stockholders or the corporation might lawfully make. Both resolutions therefore received more than the vote required by the twenty-seventh section of the corporation act and by the by-law of the company. If all the shareholders had intended to convert their preferred shares into 5 per cent. bonds, they would, of course, have voted for the conversion resolution, and have rejected the bankers' contract. In a scheme involving such an enormous amount of capital, and affecting thousands of shareholders, it could not reasonably have been supposed that all would prefer to accept the 5 per cent. bonds, and it was, therefore, the exercise of a prudent foresight that prompted them, in order to assure the successful execution of the plan, to secure the co-operation of bankers who could command millions of capital. When the subject-matter of this litigation was before this court at the June term, 1902, in the case of Berger v. The United States Steel Corporation, 53 Atl. 68, it was expressly declared: First. That the act concerning corporations, as revised in 1896, authorizes corporations formed under it to retire shares of its preferred stock purchased with bonds or the proceeds of bonds issued for that purpose, the provisions of sections 27 and 29 being complied with. Second. The manner in which a duly authorized plan is to be carried through is part of the business of the corporation, and, in the absence of fraud or bad faith, is not the subject of

judicial control to any greater extent than other business of the corporation. The court cannot substitute its judgment for that of the directors and majority stockholders, and say that a less expensive plan could be successfully adopted. These questions, therefore, are not open to controversy in this case, in so far as the cost or wisdom of the plan is concerned.

There is an entire absence in the case of anything to show a taint of fraud, or an attempt to conceal from the shareholders any fact which should have influenced their action. That the entire proceeding was conducted with good faith, without concealment, and with fairness to both parties, is evinced by the fact that during all the litigation which has ensued, under the promotion of a share owner who did not attend the meeting, not one of the vast number of shareholders who were present in person or by proxy, comprising men of great business capacity, interested to the extent of millions of dollars in the conversion plan, has questioned its propriety, or expressed a desire, so far as appears, to recede from it. The contract with the bankers was submitted to the stockholders without comment, and, as stated in the resolutions, of which a copy was tendered to the stockholders, "was not finally to become or to be operative until after approval thereof by the stockholders in special meeting assembled."

The first reason to be considered, upon which the complainants rely to maintain their injunction, is that the action of the directors in passing the resolutions for the plan of conversion and approving the bankers' contract was fraudulent and void, because 15 or more of the 24 members of the board of directors were interested in the syndicate which was formed to assist in carrying out the bankers' contract, and to share its profits; and that the plan was never properly and legally ratified by the two-thirds vote of the stockholders required by the corporation act, inasmuch as the votes upon the stock held or controlled by the bankers' firm and members of the syndicate must be counted to make up the necessary two-thirds, and without those votes the requisite number did not approve the reduction of stock. The insistment that the votes of members of the syndicate who were also directors of the company cannot be lawfully counted in order to constitute a two-thirds vote in favor of the resolution to reduce the amount of preferred stock is without any foundation in reason or in law. They voted upon that resolution, not as directors, not in their fiduciary capacity, but solely in the right of the shares of stock held by them. A most valuable privilege, which attaches to the ownership of stock in a corporation, is the right to vote upon it at any meeting of stockholders. to that resolution, considered by itself, as stockholders, they owed no greater duty to their co-stockholders than those stockholders

As

owed to them. Like other stockholders, they had a right to be influenced by what they conceived to be for their own interest, and they cannot lawfully be denied that right, nor can it be limited or circumscribed by the fact that they occupied the position of directors in the company. With respect to the bankers' contract a very different rule applies. The rule that directors cannot lawfully enter into a contract in the benefit of which even one of their number participates without the knowledge and consent of the stockholders is so firmly entrenched in our jurisprudence that it is not open to debate. It is emphasized and enforced in the following, among many other cases: Staats v. Bergen, 17 N. J. Eq. 554; Winans v. Crane, 36 N. J. Law, 394; Stroud v. Consumers' Water Co., 56 N. J. Law, 422, 28 Atl. 578; Gardner v. Butler, 30 N. J. Eq. 702; Guild v. Parker, 43 N. J. Law, 430; Stewart v. Lehigh Valley R. Rd., 38 N. J. Law, 505; Traction Co. v. Board of Works, 56 N. J. Law, 431, 29 Atl. 163. The rule is imbedded in our jurisprudence, and it cannot be too strongly stated or too vigorously applied. But in the cases cited the contract was made by the trustee without the knowledge or consent of the cestui que trust, and without subsequent ratification or adoption by which the vice in it could be cured. The object of the rule is to prevent directors from secretly using their fiduciary position for their own emolument, and not to impair the right of stockholders to enter into any lawful engagement with a full disclosure of the facts. In Stewart v. Lehigh Valley R. R. Co., supra, Mr. Justice Dixon, in delivering the opinion of this court, says: "After an examination of all the cases cited, as also such others as I have found, and a careful consideration of the principle, and the results of regarding and disregarding it, I have come to the conviction that the true legal rule is that such a contract is not void, but voidable, to be avoided at the option of the cestui que trust, exercised within a reasonable time. I can see no further safe modification or relaxation of the principle than this." It is a settled rule of corporation law that the personal interest of directors renders a transaction voidable at the option of the stockholders, and not void per se. Under the declaration of

this court in the case last cited the shareholders may, within a reasonable time after the disclosure to them of the interest of a director, elect to avoid the contract; but, if an unreasonable time is allowed to elapse without exercising such option, during which the position of directors becomes so changed that it would be inequitable to vacate the engagement, equity would refuse to interpose. A fortiori, when the contract is entered into by the stockholders with the directors, or when the stockholders expressly authorize the directors to enter into a con tract, when the stockholders have notice of the directors' interest, the agreement will be

unassailable in the absence of actual fraud or want of power in the corporation. In this case, not only was the bankers' contract made with J. P. Morgan & Co., and approved by a two-thirds vote of the shareholders, with knowledge that J. P. Morgan was one of the directors of the steel corporation,-a fact which they may be presumed to have known, -but also in the circular letter accompanying the call of the stockholders' meeting to be held on the 19th of May, it was expressly stated as follows: "To further the success of the plan, there has been formed a syndicate, including some directors, which will receive four-fifths of the four per cent. compensation to be paid under the contract with Messrs J. P. Morgan & Company, mentioned in the notice of stockholders' meeting." The deliverance of this court with respect to the sufficiency of notice in Gale v. Morris, 30 N. J. Eq. 285, is as follows: "If the party notified make reasonable investigation, he obtains actual knowledge of these facts; if he chose not to make it, he is charged constructively with knowledge of them. The rule merely prohibits him from taking advantage of his own imprudence to the detriment of another. But as to the matters that lie within the notice, the principle assumes another form. It charges the party with knowledge of those matters so far as reasonable inquiry has not dissipated their credibility. If he is unwilling to act upon the facts as the notice presents them, then the law demands that he shall make proper examination, and upon the result of that examination he may safely stand. Williamson v. Brown, 15 N. Y. 354. But if he prefer not to examine, it must be because he is satisfied to act as if the matters disclosed in the notice were true; and he cannot afterwards complain if his rights are made to rest upon them so far as they are true. The information given by the notice is equivalent to that obtained by inquiry." In Haslett v. Stephany, 55 N. J. Eq. 68, 36 Atl. 498, Vice Chancellor Pitney said: "For these reasons I think that the facts above stated, which were clearly within defendant's knowledge, were sufficient to put him upon inquiry. The general doctrine that facts which are sufficient to put a party upon inquiry are sufficient to charge him with all such knowledge as he would have acquired by a proper inquiry in the ordinary course of business is, as I take it, thoroughly established in this state. It was so held in the court of appeals in the case just cited [Power Co. v. Veghte, 21 N. J. Eq. 463], and that case followed Hoy v. Bramhall, 19 N. J. Eq. 563, 97 Am. Dec. 687, in the same court. The doctrine of these cases has always been followed in New Jersey." The cases in England are to the like effect. Phosphate of Lime Co. v. Green, L. R. 7 C. P. 43; May v. Chapman, 16 Mees. & W. 355. The stockholders of the company are, therefore, chargeable with express notice that some

directors were interested in the bankers' contract, and by reasonable inquiry at the meeting of May 19th they could have ascertained the names and number of such directors. They signified by their votes that they approved the contract with such full knowledge.

In Durfee v. Old Colony R. Co., 5 Allen, 230, Chief Justice Bigelow says: "It may be stated as an indisputable proposition that every person who becomes a member of a corporation aggregate by purchasing and holding shares agrees by necessary implication that he will be bound by all acts and proceedings, within the scope of the powers and authority conferred by the charter, which shall be adopted or sanctioned by the vote of the majority of the shareholders of the corporation, duly taken and ascertained according to law. This is the unavoidable result of the fundamental principle that the majority of the stockholders can regulate and control the lawful exercise of the powers conferred on a corporation by its charter." In the case of the steel corporation the right of the majority does not rest upon implication: In the by-laws adopted by the stockholders, in pursuance of authority given by the act of incorporation, such power is expressly given to the majority. In Leavenworth Co. v. Chicago Railway Co., 134 U. S. 688, 10 Sup. Ct. 708, 33 L. Ed. 1064, it was held that the action of the stockholders validated the contract where 9 out of 13 directors were personally interested. In the cases of Nye v. Storer, 168 Mass. 53, 46 N. E. 402, and Bjorngaard v. Goodhue County Bank, 49 Minn. 483, 52 N. W. 48, a like infirmity in contracts was held to be eliminated by the vote of a majority of stockholders. The like view is expressed by the court of appeals of Maryland in Shaw v. Davis, 28 Atl. 619, 23 L. R. A. 294, as follows: "It may be stated, as the result of all the authorities, that whenever any action of either directors or stockholders is relied on in a suit by a minority stockholder for the purpose of invoking the interposition of a court of equity, if the act complained of be neither ultra vires, fraudulent, or illegal, the court will refuse its intervention, because powerless to grant it, and will leave all such matters to be disposed of by the majority of the stockholders in such manner as their interest may dictate; and their action will be binding on all, whether approved of by the minority or not." The healing effect of the ratification by stockholders upon a voidable contract entered into by directors is fully recognized in Grant v. United Kingdom Switchback Rys. Co., 40 Ch. Div. 135. In the case sub judice the contract was, in effect, made between the stockholders themselves and J. P. Morgan & Co., and it cannot be successfully assailed, without maintaining that stockholders are without capacity to make a valid contract with the directors of their company. It would be manifestly contrary to fair dealing