Professional Documents
Culture Documents
2) OTIS & CO. sued PENNSYLVANIA R. CO., its directors and officers, its
wholly-owned subsidiary and some of the latter’s directors and officers
contending that:
ISSUE: WON the individual defendants are liable for alleged losses
suffered by the PENNSYLVANIA R. CO. arising out of the issuance and sale of
over $28M in bonds by its wholly-owned subsidiary (which guaranteed the
bonds)?
RATIO:
1) It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and directors of
a C and the court is w/o authority to substitute its judgment of the BOD; the
B is the business manager of the C and so long as it acts in GF its orders are
not reviewable by the courts.
RATIO: Honesty alone does not suffice; the honesty of the directors in
this case is unquestioned. But there must be more than honesty-there must
be diligence, and that means care and prudence, as well. This transaction
was unusual.
Walker v. Man, et al. (NY, 1931)
1) BANK trustee sued the former directors of a bankrupt BANK for
dereliction of duty and mismanagement in the conduct of the bankrupt’s
affairs for non-feasance:
3) The stocks were actually purchased from the 2 former directors of the
C and resigned before the BOD approved the purchase and declared
dividends.
HELD: The Ds did not act in GF or that they were grossly ignorant of
their duties. The authorized capital stock was P20,000 divided into 2,000
shares of the par value of P10 each, of w/c only P10,030 was subscribed and
paid. Deducting the P3,300 paid for the purchase of the stock, there would
be left P7,000 of paid up stock, fro w/c deduct P3,000 paid in dividends,
there would be left only P4,000. In this situation and upon this state of facts,
it is very apparent that the Ds did not act in GF or that they were grossly
ignorant of their duties.
RATIO:
The plaintiff must show that, had Andrews done his full duty he could
have made the C prosper or at least could have broken its fall. He must
show what sum he could have saved the C. Neither of these has he made
any effort to do so.
RATIO: The defendant is not subject to the burden of proving that the
loss would have happened, whether he had done his duty or not. If he were,
it would come to this: That, if a D were once shown slack in his duties, he
would stand charged prima facie w/ the difference between the corporate
treasury as it was, and as it would be judged by a hypothetical standard of
success. .. No men of sense would take an office, if the law imposed upon
them a guaranty of the general success of their companies as a penalty for
negligence.
Ds are not specialists, like lawyers or doctors. They mush have a good
sense, perhaps they must have acquaintance w/ affairs; but they need not-
perhaps they should not-have any technical talent. They are the general
advisers of the business, and if they faithfully give such liability as they have
to their charge, it would not be lawful to hold them LB.
HELD: Ds NOT LB. Directors should not be held answerable for taking
the cashier’s statement of liabilities to be as correct as the statement of
assets always was. Their confidence seemed warranted by the semi-annual
examinations by the government examiner and they were encouraged in
their belief that all was well y the president, whose responsibility as
executive was in order; interest was large stockholder ad depositor; and
knowledge, from long daily presence in the bank, were greater than theirs.
4) Shortly after the plaintiff left the Philippine Islands for China, the other
directors, the defendants in this case, held a meeting on December 24,
1903, for the purpose of discussing the condition of the company at that
time and determining what course to pursue. They did on that date enter
into the following contract with the defendant McCullough, to wit:
"For value received, this contract and all the rights and interests of the Philippine
Engineering and Construction Company in the same are hereby assigned to E. C.
McCullough of Manila, P. I.
(Sgd.) "E. C. MCCULLOUGH)
"President, Philippine Engineering and Construction Company.
(Sgd.) "F. E. GREEN, Treasurer.
(Sgd.) "THOMAS L. HARTIGAN, Secretary."
ISSUE 1: Did a majority of the stockholders, who were at the same time a
majority of the directors of this corporation, have the power under the law
and its articles of agreement, to sell or transfer to one of its members the
assets of said corporation?
HELD 1: There were only five stockholders in this corporation at any time,
four of whom were the directors who made the sale, and the other the
plaintiff, who was absent in China when the said sale took place. The sale
was, therefore, made by the unanimous consent of four-fifths of all the
stockholders. Under the articles of incorporation, the stockholders and
directors had general ordinary powers. There is nothing in said articles which
expressly prohibits the sale or transfer of the corporate property to one of
the, stockholders of said corporation.
HELD 2: We conclude that the sale or transfer made by the quorum of the
board of directors-a majority of the stockholders-is valid and binding upon
the minority-the plaintiff. This conclusion is not in violation of the articles of
incorporation of the Philippine Engineering and Construction Company.
What were the circumstances under which said sale was made? The
corporation had been going from bad to worse. The work of trying to raise
the sunken Spanish fleet had been for several months abandoned. The
corporation under the management of the plaintiff had entirely failed in this
undertaking. It had broken its contract with the naval authorities and the
$10,000 Mexican currency deposited had been confiscated. It had no money.
It was considerably in debt. It was a losing concern and a financial failure. To
continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter
insolvency. The majority of the stockholders or directors sold the
assets of this corporation, thereby relieving themselves and the
plaintiff of all responsibility. This was the only wise and sensible
thing for them to do. They acted in perfectly good faith and for the
best interests of all the stockholders. "It would be a harsh rule that
would permit one stockholder, or any minority of stockholders to hold a
majority to their investment where a continuation of the business would be
at a loss and where there was no prospect or hope that the enterprise would
be profitable."
The above sets forth the condition of this insolvent corporation when
the defendant McCullough proposed to the majority of stockholders to take
over the assets and assume all responsibility for the payment of the debts
and the completion of the warehouses which had been undertaken.
But as we have said when the sale or transfer under consideration took
place, there were three directors present, and all voted in favor of making
this sale. It was not necessary for the president, McCullough, to vote. There
was a quorum without him: a quorum of the directors, and at the same time
a majority of the stockholders.
Again, McCullough did not represent the corporation in this
transaction. It was represented by a quorum of the board of directors, who
were at the same time a majority of the stockholders. Ordinarily,
McCullough's duties as president were to preside at the meetings, rule on
questions of order, vote in case of a tie, etc. He could not have voted in this
transaction because there was no tie.
We have subjected their conduct to this test, and, under the evidence,
we believe it has safely emerged from the ordeal.
RATIO: