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CHAPTER XVII.

UNFAIR METHODS AS SEEN IN ABUSES OF CORPORATE CONTROL.

1. Unfair Manipulation and Conduct.

2. Unfair Exercise of Voting Power.

Useful Comparisons.-Information useful for our purpose is contained in those reported cases that define and apply the rules and principles of equity in corporation actions which turn on the element of unfairness; and the substance of those decisions will now be shown as an aid to interpreting the phrase "unfair methods of competition in commerce" (Section 5 of Federal Trade Commission Act) which constitutes the essence of the recent enactments intended to supplement and make effective the Anti-trust laws.

Rule in Patent and Copyright Cases.-In the absence of decisions stating the position of the Federal Trade Commission in respect to delimiting the prohibitions against "unfair methods" contained in the creating statute, it is a fortunate circumstance that the corresponding expression "unfair trade" has an acknowledged and well-rounded significance in Patent and Copyright Law, and under that system of rulings which now protects the use of Trade-marks and Trade Names; and the leading cases constituting or explaining that doctrine will be found already set forth herein, in Chapters XV and XVI.

This system of interpretations and constructions may be turned to convenient and useful account when exploring and mapping out the territory which Congress, in response to a public demand, has seen fit to assign to the Federal Trade Commission for its particular jurisdiction and province.

Natural Divisions of Topic.-Matters connected with abuses of corporate control fall naturally under two heads; and we shall undertake for our immediate consideration:

1. UNFAIR MANIPULATION AND CONDUCT IN MANAGEMENT of and dealings with CORPORATIONS. Similar Principle Educed in Corporation Law. The duty of overseeing and codifying correct methods of business pro

cedure should and we believe will to a considerable degree be assisted and simplified by reference to a similar line of cases construing and defining “unfair dealings," contained in corporation law. Certainly in a jurisdiction which extends throughout the confines of the United States and its various possessions and dependencies and even reaches to "commerce with foreign nations" (Clayton Law, Section 1, paragraph 2), no source of enlightening and useful information should be passed by or withheld.

The class of cases now referred to and considered offer decisions of greater antiquity than those comprised in Patent and Copyright law and possess at least equal authority as precedents for the Commission's guidance; they bear directly upon the subject in hand and express disapproval of "unfair" acts when these occur in connection with the affairs of incorporated bodies.

Definite Rule of Conduct Established.-In brief, this line of leading cases has established a definite rule of conduct that is enforced whenever similar situations are discovered in connection with the management of corporations.

Instances Where Rule was Applied. Thus, sale of corporate property to pay the claim of a director, where the debt was occasioned by the mismanagement of the Board, is open to objection, and such action will be restrained;1 again, authority to sell the lands of the corporation does not make legal or permit a sale to the wife of a director exercising such power, unless the consideration represents the full value. Where a director bought the assets of his company for a small price at sheriff's sale, he is chargeable with the profit; and a court of equity will require him to account for this profit and return such sum to the treasury of the company.

Rule Applies Where Actual Injury Shown.-These cases are fairly illustrative of "unfair dealings" which if not unlawful per se, at least are voidable upon the complaint of a creditor or fellow shareholder. Some injury, of course, must be shown to remove the case from the regions of mere theory and debate, or of objection on the part of a volunteer in the transaction; but

1 Crescent City Brewing Co. v. Flanner, 44 La. Ann. 22; 10 South. 384. 2 Green v. Hugo, 81 Tex. 452; 17 S. W. 79; 26 Am. St. 824. 3 Tobin Canning Co. v. Frazer, 81 Tex. 407, 17 S. W. 25.

from the multitude of adjudicated cases there has developed a line of decisions which constitute a distinct department of equity jurisprudence and make for fair dealings within the confines of corporate management and control.

"Minority Stockholder's Rights" Explained. This subject is known and treated of in the text books under the title "Minority Stockholder's Rights," for the reason that acts of this description almost invariably arise from abuse of power on the part of the controlling majority, or of their representatives—the officers or directors who manage the affairs and business of the corporation. A proper measure of authority, of course, is an incident and prime necessity in the management of every incorporated body; it is only the abuse of power which can be made the subject of just complaint.

Application is Reasonable.-That the rules of proper behavior in such matters are not unreasonable is instanced by the fact that stockholders may deal together regardless of whether a director is concerned in the transaction, if there is no actual misleading; and other stockholders cannot be heard to complain because such official position has clothed one of the parties with superior knowledge.*

Unfair Management of Corporation.-Instances of unfair conduct in corporate management are so largely matters of common knowledge that it will not be necessary to multiply examples, except to the extent necessary to deduce the rule resulting therefrom, in order that the instances cited may be employed in explaining or construing similar situations as and when they arise in connection with proceedings before the Federal Trade Commission.

Cases Illustrating Rule.-An agreement to pay a salary to the manager on condition that he shall buy stock, which the directors in turn engage to buy back from him at an advance, has been held voidable at the instance of a protesting stockholder, since directors have no authority in law to make a contract to give one stockholder a preference over another of the same class; even proof of good faith will not legalize such methods." Where a director serves upon two boards, and there are joint

4 Haarstick v. Fox, 9 Utah 110, 33 Pac. 351, 156 U. S. 674; McIntire v. Ajax Mining Co., 17 Utah 213, 20 id. 323, 28 id. 162, 77 Pac. 613.

5 Wilbur v. Stopel, 82 Mich. 344, 46 N. W. 724, 21 Am. St. 568.

dealings between the companies, he is prohibited from persuading either company to enter upon contracts where his personal interests would run counter to those of the corporation. Only confirmation by the stockholders, with full knowledge, and the absence of any impairment of the rights of creditors will legitimatize the transaction and overcome the presumption that some unfair advantage has occurred.

Standard of Fair Dealing Maintained.-In so far as acts of this general description are the outcome of the fiduciary relationship growing out of the trust imposed in the governing board, decisions by the courts of highest authority insist upon a standard of fair dealing; indeed, a disinterested board is esteemed so necessary to the orderly and proper administration of the affairs of the company that in a case where a director who was receivng a profit from the particular transaction was conclusively shown to be in possession of the deciding vote, the resultant contract was adjudged unfair and set aside."

Great Variety of Unfair Means.-Such methods are semifraudulent in their nature, and certainly resemble and perhaps equal fully matured frauds in one respect, viz.: their form and variety is endless, limited only by ingenuity of the human mind. That there exists a legion of these nefarious schemes has been shown at another place,-Chapter XVI, pages 215, 218-9.

Offices Exclusive Property of Corporation.-Instances have occurred where the executive officers have been shown to be likewise remiss in their dealings with the corporation. In a leading case it appeared that the president had received a sum of money for surrendering his office and contriving by his influence to secure the election of an agreed successor. A corporation entrusted to the protection and guidance of officials of this description naturally fell away, and its affairs at length came into the hands of a receiver.

In an action for restitution it was held such conduct constituted unfairness in an aggravated form; that the offices are the exclusive property of the corporation and no person will be permitted to transform them into personal gain; that defendant's

6 Langan v. Francklyn, 29 Abb. N. C. (N. Y.) 102; McGourkey v. Toledo & O. C. Ry. Co., 146 U. S. 536; Jacobus v. Am. Min. Water Mch. Co., 38 Mise (N. Y.) 371; 77 N. Y. Supp. 898.

7 Higgins v. Lansingh, 154 Ill. 301, 40 N. E. 362; Gildersleeve v. Lester, 68 Hun (N. Y.) 532.

act was a perversion of the powers of office and a fraud upon the corporate body; and the court in accordance with those findings set aside the corrupt transaction and decreed that the sum involved-three thousand dollars-should be paid into the treasury of the corporation.R

Manipulation of Joint Control.-Manipulation of the control of one corporation so as to enable a rival concern to acquire the remaining shares at an inadequate price; and the bringing of needless suits to waste the company's assets and destroy its business, are other illustrations of the same unregenerate type of dealings in corporate affairs;10 although it should be noted that in cases of this sort it is the manipulation of the combined management and stock-control rather than any individual act which constitutes the instigation and carrying through of the illicit scheme.

Redress through Court of Equity.-The means of preventing or overcoming such acts has been in most instances a representative action in equity, brought by a minority stockholder on behalf of himself and the other owners of shares who may be similarly situated. The action, in theory of law, is brought by or for the corporation; but in practice it is usual to make the corporation a party defendant, as otherwise it would be necessary to engage the services, or at least the co-operation of the officials concerned in the transaction, upon which the charge is based, a course which would be manifestly absurd. The benefits of the litigation accrue to the corporation; although the moving parties may be allowed to retain the expenses of counsel and cther necessary outlays, in a proper case.

Results not Ideal, though often Effectual.-It must be admitted that this plan of procedure is not ideal. There is something approaching an anti-climax in the wording of a decree requiring that restitution be made by depositing a fund in the treasury of the corporation, when it is certain the major portion will in due course find its way back into the pockets of the guilty control. However, knowledge that a court will or may scrutinize the guilty transaction, and the possibility of publicity which will

8 McClure v. Law, 161 N. Y. 78, 55 N. E. 388, 76 Am. St. 262.

9 Farmers' Loan & Trust Co. v. Trustees of N. Y. & West. R. R. Co., 150 N. Y. 410, 44 N. E. 1043, 34 L. R. A. 76, 55 Am. St. 689; Macklem v. Fales, 130 Mich. 66.

10 George v. Central R. R. Co., 101 Ala. 607, 14 South. 752.

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