ARGUED JANUARY 9, 1961.
DECIDED FEBRUARY 9, 1961.
Equitable petition. Richmond Superior Court. Before Judge Anderson.
Cumming, Nixon, Eve, Waller Capers, for plaintiff in error.
Fulcher, Fulcher, Hagler Harper, John F. Hardin, for parties at interest not parties to record.
Hull, Willingham, Towill Norman, Harris, Chance, McCracken Harrison, Jones, Bird, Williams Howell, Eugene T. Branch, contra.
1. The cross-action of the defendant corporation failing to allege any breach of duty the plaintiffs as stockholders and directors owed the corporation or its properties, it was not error to sustain the general demurrers and strike the cross-bill.
2. Though an imperfect cause of action may be made perfect by a suitable amendment, a petition or cross-bill which asserts no cause of action cannot be converted by amendment into a cause of action.
ARGUED JANUARY 9, 1961 — DECIDED FEBRUARY 9, 1961.
On February 12, 1960, Landon Thomas Clay, Harris M. Clay, Mrs. Emily Thomas Clay, and Miss Ellen Thomas brought a bill in equity in the Superior Court of Richmond Court against the plaintiff in error, hereinafter referred to as the King Mill, which is a corporation incorporated under the laws of Georgia, naming as codefendants certain officers and the members of the board of directors of the King Mill. In this petition it was alleged that certain conduct on the part of the defendants had deprived the plaintiffs of what they alleged was their right and power to take control of the voting stock of the King Mill; alleging that they had acquired a majority of the voting common stock, which gave them the power to retire the preferred stock, the preferred stock having voting rights at all stockholders' meetings and on all questions except on the question of its retirement.
An answer was filed by the corporation, which included a cross-bill in which were alleged the manner by which and the purposes for which the voting common stock had been acquired by two of the plaintiffs, Landon Thomas Clay and Harris M. Clay, who are the defendants in error in this case, and who will be referred to as the Clays. The cross-bill charged that the Clays, while members of the board of directors of the King Mill, had, in violation of their fiduciary obligations as such directors, conspired illegally to seize control of the King Mill for purposes contrary to the best interests of the King Mill and its stockholders; that they acquired this stock secretively and without the knowledge or consent of the other members of the board of directors or of the officers of the King Mill; and that this conduct constituted an unlawful conspiracy, the purpose of which it was believed was to sell the control of the King Mill to foreign interests or to sell all the assets of the King Mill and create a holding company, which belief was so widespread that it caused a substantial deterioration in the morale of the King Mill's employees, especially the key personnel, to the detriment of the King Mill.
In the cross-bill it was further alleged that the Clays are non-residents of Georgia.
In count 1 of the cross-bill, it was alleged that the Clays were guilty of fraud in that, for personal reasons and in a manner detrimental to the King Mill, they had acquired the voting common stock, and that it was held by them in trust for the benefit of the King Mill at a fair market value.
In count 2 of the cross-bill, the King Mill alleged that the stockholders selling their stock to the Clays were fraudulently led to believe that the Clays, as two members of the board of directors, represented the management, and their acquisition of the stock by these fraudulent means impressed it with an involuntary voting trust in favor of the board of directors of the King Mill.
In count 3 of the cross-bill, it was alleged that the Clays should be temporarily restrained and permanently enjoined from exercising the right to vote the stock which they had acquired in the fraudulent manner above described; otherwise, they would be guilty of a breach of trust should they vote the said stock to their own personal interests.
The prayers of the cross-bill were for equitable relief in impressing the stock with a trust and the voting power with a voting trust, and enjoining the Clays from voting the stock, all as stated in the allegations of the cross-bill as being necessary to give the equitable relief to which the King Mill was entitled by reason of the fraud alleged to have been practiced upon it by the Clays while acting as directors.
A general demurrer was filed to the cross-bill by the plaintiffs in the original case.
The dismissal of the petition was "without prejudice as to any rights of the defendant, The John P. King Manufacturing Company, under its cross-bill filed in this cause and the pleadings of petitioners in defense thereof."
After dismissal, the King Mill filed an amendment to its cross-bill, which was allowed subject to objections. The amendment described in detail the relationship of the original plaintiffs with the King Mill and certain of its officers, and the genesis of the scheme of the Clays to seize control of the King Mill and dispose of it in a manner inconsistent with its charter powers and against the interest of the King Mill. The execution of the scheme to seize control by purchasing additional stock was alleged in detail in the amendment.
It was further alleged in the amendment that the board of directors considered a sale of treasury stock to certain employees selected according to tests of official status and length of service, and appointed a committee to investigate the question of a stock-purchase plan and to report back.
It was further alleged in the amendment that the Clays were promptly advised of the stock-purchase plan and the sale of the treasury stock as the result thereof, and that, even though they knew the transaction had been fully executed, and there were 6,815 shares held by bona fide purchasers for value, they (the said Clays) mailed to all the stockholders a printed letter attacking the sale and the validity of the employee stock-purchase plan.
The amendment further alleged that the Clays had proceeded in the United States District Court in the State of New York, seeking substantially the same equitable relief as they did in this Georgia case. It was further alleged that it would be a fraud on the Georgia court and contrary to the principles of justice and equity should the Clays, having stirred up a controversy, be permitted to proceed in the New York action, in which seven out of eight directors are not parties and to which none of the employees purchasing the stock is a party.
It was further alleged in the amendment that the New York action constituted "forum shopping", and the amendment prayed that the Clays be temporarily restrained and permanently enjoined from proceeding in the New York action. There were further prayers amplifying those in the original cross-bill, and that the court declare the employee stock-purchase plan to be legal, and that the Clays be required to account in damages to the King Mill in such amount as shall be shown to have been sustained by the King Mill as the result of the controversy which they created by their attack on the legality of the sale of the treasury stock and the consequent confusion and uncertainty.
The Clays moved to strike the amendment to the cross-bill and renewed their general demurrer to the original cross-bill, and demurred generally to the cross-bill as amended. The trial judge sustained the general demurrer to the cross-bill and disallowed and dismissed the amendment to the cross-bill.
To this order the King Mill excepted and assigned the same as error.
1. We first consider the defendant corporation's contention that the court erred in sustaining the plaintiff's general demurrer to its cross-bill.
The gist of the corporation's assertion that it is entitled to equitable relief as against the plaintiffs is: that the plaintiffs while members of the corporation's board of directors, in violation of their obligation arising from the fiduciary capacity they occupied, conspired to get control of the corporation by buying the stock of other stockholders, some in excess of the market value of the stock, for the purpose of selling their controlling interest to a foreign interest or selling all of the assets to the detriment of the corporation; that they as directors were, first, guilty of fraud, in that for personal reasons detrimental to the corporation they had acquired a named amount of shares, and they hold such shares in trust for the benefit of the corporation; second, that, in the purchase of these shares, they did so without the knowledge and consent of the board of directors of the corporation, and the voting rights of the acquired stock are impressed with an involuntary voting trust in favor of the directors; and, third, having acquired the stock in bad faith they should be enjoined from voting the stock.
Directors and officers in the management and use of corporate property in which they act as fiduciaries and are trustees are charged with serving the interests of the corporation as well as those of all the stockholders. Atlanta Real Estate Co. v. Atlanta Nat. Bank, 75 Ga. 40; Oliver v. Oliver, 118 Ga. 362 ( 45 S.E. 232); Fricker v. Americus Mfg. c. Co., 124 Ga. 165 ( 52 S.E. 65). Equity will afford relief to the corporation in an action against the directors for a breach of their duties to the corporation where injury results to the corporation or its stockholders. Smith v. Coolidge Banking Co., 147 Ga. 7 ( 92 S.E. 519); Wagner v. Biscoe, 190 Ga. 474 ( 9 S.E.2d 650); Comolli v. Coggins, 200 Ga. 620 ( 37 S.E.2d 793); Kimbrough v. Gainesville Mather Co., 53 Ga. App. 735 ( 187 S.E. 169). However, in the instant case none of the acts of the plaintiffs in their capacity as directors relate to their duties in the management or control of corporate property or corporate assets, but relate solely to their acts in acquiring the stock of other stockholders of the corporation who are not complaining. Counsel have cited us no statute of this State or any decision of this court holding that a corporation can object to one or more stockholders, though they also be directors in the corporation, purchasing the stock of other stockholders, because the motives and reasons for the purchase were not first disclosed to the other officers, directors, and stockholders, even if the purchase of the stock be for the purpose of obtaining a majority of the stock and liquidating the corporation.
A director in dealing with another stockholder for the purchase of his stock is under the same duties as partners, agents, and other fiduciaries to make a full disclosure of all material facts relative to the value of the corporate property under his control, known to him and unknown to the selling stockholders. Where the sources of information are not equally accessible to both parties and for a breach of that duty the selling stockholder has a right of action against the purchasing directors. Oliver v. Oliver, supra. A director in buying the stock is not under such duty to the corporation or the other directors. Stock in a corporation owned by an individual is his property and the corporation is not concerned in the disposition of his stock. Nor is it any concern of the corporation as to who purchases the stock, even if it be the purpose of the purchaser to gain control of a majority of the outstanding stock. See Straton's Independence v. Dines, 126 F. 968, aff'd, 135 F. 446; Insurance Agency v. Blossom (Mo.App.) 231 S.W. 636; 12 Fletcher Cyc. Corp. §§ 5452, 5449.
The cases relied on by the defendant ( Manning v. Wills, 193 Ga. 82, 17 S.E.2d 261); Benedict v. Rue, 260 F.2d 97; Westwood v. Continental Can Co., 80 F.2d 494; Blazer v. Black, 196 F.2d 139), are not in point here, for the reason that they, as Oliver v. Oliver, supra, were actions in which the stockholder was asserting a breach of a duty owed to him on the part of a director purchasing stock.
The cross-bill failing to show that the plaintiffs in their capacity as either stockholders or officers of the corporation have breached any legal duty owed to the corporation that would give rise to any relief, legal or equitable, it was not error to sustain the plaintiffs' general demurrer and dismiss the cross bill.
2. We next consider the assignment of error on the court's refusal to allow the amendment to the cross-bill. Counsel for the defendant insists that, under Code §§ 81-1301 and 81-1302, the cross-bill, showing a plaintiff and a defendant and setting out sufficient facts to indicate and specify some particular fact or transaction as a cause of action, was sufficient to support an amendment. In Ellison v. Ga. R. Co., 87 Ga. 691, 699, 709 ( 13 S.E. 809), it was said: "Relatively to the law of pleading, a cause of action is some particular legal duty of the defendant to the plaintiff, together with some definite breach of that duty which occasions loss or damage. Though it is the breach and not the duty itself which justifies the action or causes it to be brought, yet every breach involves a duty, and in order to make the breach appear, it is indispensable that the duty also should appear . . . And to render the amendment offered admissible, it must contain not merely the quantity and general quality of matter requisite to fill out the declaration, but its matter must be the residue of the identical cause of action of which a part is already described in the declaration. The identity may be disclosed through the duty element alone, or through the breach element alone, or partly through each. Some transaction must be indicated, and some particular duty and breach in respect to that transaction must apparently be asserted by the declaration, and must be shown to exist by the amendment." This court in Davis v. Muscogee Mfg. Co., 106 Ga. 126, 129 ( 32 S.E. 30) said: "The omission in the original petition in the present case was not due to a failure to allege some essential fact which was necessary to a cause of action imperfectly set forth therein, but was an omission to allege in any way whatever a state of facts which would constitute a cause of action against the defendant. We can not hold that it was the intention of this court in Ellison's case to carry the law of amendment to such an extent. An imperfect cause of action may be made perfect by a suitable amendment. No cause of action whatever can not by amendment be converted into a cause of action."
The cross-bill wholly fails to show that the plaintiffs owed any duty to the defendant corporation with respect to their buying the stock of other stockholders. Asserting no cause whatever, it cannot by amendment be converted into a cause of action.
It is insisted that, since the plaintiffs are nonresidents and have voluntarily submitted themselves to the jurisdiction of the court in all matters directly connected with the case they had originated, this constituted an intervening equity that would permit the defendant to assert any counterclaim growing out of the original suit which the defendant sees fit to set up by a cross-action. Conceding the correctness of this contention ( Ray v. Home Foreign Investment c. Co., 106 Ga. 492, 32 S.E. 603; Aetna Insurance Co. v. Lunsford, 179 Ga. 716, 177 S.E. 727), this principle has no application here, for the reason that the rules of practice and procedure as regards amendments to pleading apply whether the plaintiff be a resident or a nonresident. If the cross-action fails to set forth a cause of action, the fact of nonresidence of the plaintiffs does not give the defendant the right by way of amendment to institute an independent action against the plaintiffs.
The court did not err in disallowing the tendered amendment.
Judgment affirmed. All the Justices concur.