Morawetz on Private Corporations (at § 527) says: "There is no necessary impropriety in a contract between a director and the corporation, if the latter is represented by other agents. * * * To prohibit the directors, in all cases, from dealing with the corporation, would often deprive the latter, in time of need, of the assistance of those persons who have the greatest interest in its welfare, and who are willing to give their aid upon the most reasonable terms." As was said by Judge CHASE in his opinion in the case of Billings v. Shaw ( 209 N.Y. 265, at p. 280): "If a profit is made in a transaction that is honest in itself, and is open and fully disclosed, and the transaction is consummated after an honest statement of the facts to the board of directors at a meeting and to the stockholders at a stockholders' meeting, there is no reason for criticism or for charging such director with any profit he may make." (See, also, Continental Securities Co. v. Belmont, 83 Misc. 340.)
It has long been the law in this State that a corporation must be managed by the board of directors (Business Corporation Law, § 701) who serve as trustees for the benefit of the corporation and all its shareholders (see, e.g., Billings v Shaw, 209 N.Y. 265). To prevent control of the corporation from being diverted into the hands of individuals or groups who in some cases might not be subject to quite the same fiduciary obligations as are imposed upon directors as a matter of course, the courts have always looked unfavorably towards attempts to circumvent the discretionary authority given the board of directors by law (Manson v Curtis, 223 N.Y. 313; McQuade v Stoneham, 263 N.Y. 323; Long Park, Inc. v Trenton-New Brunswick Theatres Co., 297 N.Y. 174; see, also, Matter of Hirshon, 13 N.Y.2d 787; cf. Matter of Glekel [Gluck], 30 N.Y.2d 93).
The directors also are in the same category. With the interests of the association involved, and particularly where the same is in conflict with the individual interests of the secretary-treasurer and the stockholder claiming to control the corporation, they are held strictly accountable for their actions. The whole transaction was a fraud upon the corporation, even though the parties thought they had a right to enter into it. See Billings v. Shaw, 209 N.Y. 265, 282, 103 N.E. 142, 148. As shown in West v. Camden, 135 U.S. 507, 34 L ed 254, 10 S Ct 838, the contract with a person who holds a controlling interest in the company that a person should be permanently retained as an officer with a certain salary is void as against public policy.
Shafer v. Home Trading Co., 52 S.W.2d 464; Sec. 4959, R.S. 1929. (4) Directors or officers or persons closely associated with them, cannot, secretly, purchase claims against the corporation at a discount and retain the profit thereafter, but such profits must inure for the benefit of the corporation. Patrick v. Boonville Gas L. Co., 17 Mo. App. 469; Chouteau Ins. Co. v. Floyd, 74 Mo. 286; Brewater v. Stratman, 4 Mo. App. 42; Lingle v. Natl. Ins. Co., 45 Mo. 110; McAllen v. Woodcock, 60 Mo. 180; Kitchen v. Ry. Co., 69 Mo. 272; Wills v. Nehalem Coal Co., 52 Or. 70, 96 P. 531; Bramblet v. Commonwealth Land Co., 83 S.W. 599; North v. Union Savings Assn., 59 Or. 483, 117 P. 824; Wabunka Land Co. v. Schwanbeck, 245 Mich. 505, 222 N.W. 707; Higgins v. Lansing, 154 Ill. 301, 40 N.E. 362; Bulkley v. Whitcomb, 121 N.Y. 107; Continental Securities Co. v. Belmont, 144 N.Y.S. 801; Billings v. Shaw, 209 N.Y. 265, 103 N.E. 142; Hill v. Frazier, 22 Pa. 320; In re Allen-Foster, 227 Mass. 551, 116 N.E. 875; 2 Cook on Stockholders, sec. 660, p. 1949; Young v. Columbia Land Co., 53 Or. 438, 101 P. 212; Nix v. Ellis, 118 Ga. 345; Moulton v. Connell, 93 Tenn. 377; Holland v. Heyman, 60 Ga. 174; 1 Terry on Trusts, sec. 428; Kroegher v. Calvage, 119 F. 647; 2 Thompson on Corp., sec. 1343, p. 833; 10 Cyc. Law Proc. p. 798; and numerous cases cited in the footnote to 10 Cyc. L. Proc. from almost every State in the Union and England. That the directors paid the liability of the bank for less than the full amount, and thus extinguished that debt, is no defense to this action, and the corporation is entitled to whatever profit is made. Chouteau Ins. Co. v. Floyd, 74 Mo. 286; Angell Ames on Corp., sec. 312. (a) The liability of assignees and strangers who, in connection with officers or directors of a corporation, profit by purchasing claims against the corporation as a discount, are subject to the same rigid rules as
Land Co. v. Case, 104 Mo. 572; State ex rel. Hadley v. Bank, 197 Mo. 574; Lumber Co. v. Cramme, 204 Mo. 594; Brooker v. Trust Co., 254 Mo. 154: Land Co. v. Webster, 75 Mo. App. 457; Knufinke v. Strobel, 3 S.W.2d 400; 14 C.J. 253. (4) The notes were voidable and unenforceable for the additional reason that the stockholders and officers receiving same were either the sole and only officers and directors of the company, or substituted dummies to act for them, and were thus dealing with themselves at the expense of the company, and such notes are voidable whether they were acting in good faith or otherwise. Proctor v. Farrar (Mo.), 213 S.W. 469; Billings v. Shaw, 209 N.Y. 265. (5) A renewal note is subject to the defenses of fraud, failure of consideration and similar defenses, in the same manner as the original note. Murphy v. Gay, 37 Mo. 536; Comings v. Leedy, 114 Mo. 554; Natl. Bank v. Donnell, 172 Mo. 384; Johnson v. Grayson, 230 Mo. 380; Natl. Bank v. Laughlin, 305 Mo. 8; Ford v. Roofing Co., 285 S.W. 538; Peoples Bank v. Yager, 288 S.W. 954; Farmers Bank v. Harris, 250 S.W. 946; Schelp v. Nicholls, 263 S.W. 1017; Danforth Co. v. Crookshank, 68 Mo. App. 311; Yuniker v. English (Kan.), 247 P. 637; Saeger v. Grayton, 217 Mass. 521; City Natl. Bank v. Mason, 181 Iowa 824. (6) Plaintiff's Instruction 1 omits every issue of fraud, failure of consideration, want of notice, or duty or obligation of promoters to stockholders. An instruction for the plaintiff purporting to cover the whole case and directing verdict for him by omitting some element requisite to right of recovery is error, and is not cured by proper instruction for defendants covering all eleme
Absent a duly constituted meeting which could have discharged Loeb as a director for cause — for which notice and some type of hearing would have been necessary — Baum lacked the power to bar him from the corporate premises. The reasons for this conclusion relate to the fundamentals of the corporate structure which reposes management of corporate business in boards of directors (Business Corporation Law, § 701; Cassidy v. Uhlmann, 170 N.Y. 505; Beveridge v. New York El. R.R. Co., 112 N.Y. 1) and regards them as operating in a fiduciary capacity (see Billings v. Shaw, 209 N.Y. 265) or as trustees for the stockholders (see People ex rel. Manice v. Powell, 201 N.Y. 194). As the court stated in Beveridge (supra, p 22): "All powers directly conferred by statute, or impliedly granted, of necessity, must be exercised by the directors who are constituted by the law as the agency for the doing of corporate acts * * * Within the chartered authority they have the fullest power to regulate the concerns of a corporation".
Valentine and Starr were negotiating for disposition of their holdings to Roosevelt of which they were directors and officers. They were under the duty to full disclosure, and withdrawal from the board's deliberations on the matter was indicated, if not necessary. ( Billings v. Shaw, 209 N.Y. 265, 280; Dodge v. Richmond, 10 A.D.2d 4, 15-16.) The trial court did not find and it is not urged on this appeal that either Valentine or Starr misrepresented or failed to disclose any pertinent information. It is not contended nor does it appear that they acted for and in behalf of Roosevelt in the negotiations preceding the tender.
As we read the record, it was directed toward Borland in his personal capacity and his personal relations with the plaintiff. The appellants place great reliance on the case of Billings v. Shaw ( 209 N.Y. 265). In that case one St. John was the owner, as executor, of bonds and unpaid coupons of a corporation, aggregating $400,000; of promissory notes of the corporation, amounting to over $600,000; of an open account against the corporation, amounting to $42,000; and of two-thirds of its stock.
The liability on the law of Fighera, Giordano and Rubel and Rubel Corporation is clear under the cases. ( Billings v. Shaw, 209 N.Y. 265; Meinhard v. Salmon, 249 id. 458; Public Shoe Stores, Inc., v. Goldstein, 225 App. Div. 350.) The case of Bristol v. Scranton (63 Fed. 218) is readily distinguished. It concerned a sale under a separate instrument of personal rights, made at a time that certain corporate rights were sold under a different instrument.
The defendants, officers and directors of a railroad which they practically owned, leased it at an exorbitant rental to the other road, of which plaintiff was a stockholder and the defendants were also officers and directors. They were likewise charged with taking from the treasury of the railroad large sums of money not due them. And in Billings v. Shaw ( 209 N.Y. 265) the president and some of the directors of a corporation sold its property — its plant and boats — and distributed the proceeds according to the terms of an agreement which they kept secret from the other directors and stockholders and to their own profit. But the court in that case held that, if the transaction had been fully disclosed and consummated after an honest statement of the facts to the other directors at a regular meeting, and to the stockholders at a stockholders' meeting, there would be no cause for charging the defendants with any profits they had made.