Laughlin v. Geer, 121 Ill. App. 534 (1905)

July 11, 1905 · Illinois Appellate Court · Gen. No. 12,406

121 Ill. App. 534

Henry D. Laughlin, et al., v. David S. Geer.

Gen. No. 12,406.

1. Directors—power of removal vested in, construed. The power of removal vested hy statute in the directors of a corporation does not extend to the removal of one of their own number.

2. By-law—authorizing removing of a director. hy the directors, invalid. A by-law giving the directors power to remove one of their number in specified contingencies is illegal and void.

3. Injunction—lies to restrain removal of director. An injunction lies at the instance of a director to restrain the hoard of directors of which he is a member from removing him from office.

Appeal from interlocutory order granting injunction. Appeal from the Circuit Court of Cook County; the Hon. Murray F. Tuley, Judge, presiding. Heard in the Branch Appellate Court at the March term, 1905.

Affirmed.

Opinion filed July 11, 1905.

Statement by the Court. This is an appeal from an order granting an interlocutory injunction entered on March. 13, 1905. Notice of the application for the order was given to the defendants Henry D. Laughlin and Smith E. Allison. No notice was given to the other defendants, Owen H. Eay, John G. Sanhorn and H. M. Perry. The motion was heard upon the verified bill of complaint and the verified answer of Smith E. Allison.

From the bill and answer it appears that the National Hoílow Brake Beam Company is an Illinois corporation; and that prior to the dates hereinafter mentioned the corporation had adopted the following by-law, designated as section 12, article 11 of its by-laws:

“Sec. 12. If any member of the board of directors shall be guilty of fomenting or encouraging litigation against the company, or become disloyal to its interests; or who shall wilfully and for the purpose of defeating or breaking a quorum leave the place of meeting, or remain away from a meeting of the board, or who shall persistently use his office or vote to obstruct or defeat the transaction of the company’s business, or for the promotion of any sinister, base or selfish purpose hostile to the company’s interest or for his own gain, or who shall accept or continue to hold the office of director in any company or corporation in litigation with this company; anyone so offending or acting or situated shall be deemed an unfit person to be elected to or to longer hold the office of director in this company, and may be by the board removed from the office of director for cause, and his place filled as other vacancies are filled.”

On the 9th day of November, 1904, the complainant David S- Geer was elected a director of the company, and entered upon the duties of such director and continued to. act as such up to the time of the filing of the bill i,n this case. '

There was pending in the Circuit Court of Cook county a suit, wherein the company was complainant and one Edward B. Leigh and others were defendants, brought for the purpose of restraining the defendants in that suit from wrecking the National Hollow Brake Beam Company in the interests of the Chicago Bailway Equipment Company. In that suit the complainant in this case, on December 27, 1904-, filed a cross-bill wherein he alleged under oath that the National Hollow Brake Beam Company had ceased to do business, had forfeited its right to exist longer as a corporation, and prayed the court to take charge of it, wind up its affairs, to prohibit it from longer exercising its functions or franchise as a corporation. A decree was after-wards entered in that case by the Circuit Court adjudging that the defendants therein had been guilty of the acts charged against them in the bill of complaint.

On January 18, 1905, a meeting of the directors of the National Hollow Brake Beam Company was held, all of the directors being present except Leigh. The president of the company, Mr. Laughlin, reported to the directors the facts as to the filing of the above mentioned cross-bill against the company by complainant Geer and the averments and prayer of the cross-bill, and claimed that such act was an act of disloyalty to the company and to the trust reposed in him as a director, and that it was a flagrant violation of section 12 of article XI of the by-laws of the company. Thereupon the president preferred charges against Geer and moved the adoption of the following order:

■'“Ordered, that the report of Mr. Laughlin be received and filed, and that David S. Geer be notified in writing of the charge preferred against him, and that he is required to make answer thereto before the board at its stated meeting, tó be held on the 14th of March, 1905, at 10:30 A. M. óf that day, and that he then and there show cause why he should not be removed from his office of director as a person unfit to longer hold the office; and be it further ordered, that the secretary serve, or cause to be served, on Mr. Geer. by delivering to him a copy of this report and order, noti of this proceeding, more than ten days prior to said 14t day of March, 1905.

“That said motion was duly seconded by Director. San-born, and thereupon was put to vote, and the secretary called the roll, and the vote was five directors voting in favor of said resolution, and said Director Geer voting against it, whereupon the said motion was declared adopted.”

This order was adopted, all of the directors present except Geer voting in favor of it. Geer vpted against it. The order was then served upon Geer and he was required to show cause before the board of directors on the day named therein.

Geer then filed the bill of complaint in this cause and obtained the injunction restraining the defendants from expelling him as a director of the ¡¡National Hollow Brake Beam Company until .the further order of court.

Shope, ¡Mathis, Zahe & Weber and De Frees, Brace & ¡Ritter, for appellants.

Joiih P. Ahrehs, for appellee.

¡¡VIr. Justice Smith

delivered the opinion of the court.

Appellants contend that the by-law in question is valid under the statute, and at common law; and secondly, that a court of equity is without jurisdiction to enjoin the proceedings of the board of directors.

Section 6, chapter 82, of the statute provides that “the directors or managers * * * may remove any officers when the interests of the corporation shall require.” The question arises under this statute, and the facts set forth in the pleadings, whether a director of a corporation is an officer of the corporation, and may be removed from office by the board of directors, under this provision of the statute. In our opinion he is an officer of the corporation, but-he is not such an officer as may be removed under the power given by the statute.

The officers of a corporation formed under the act are declared to be, in 'the above mentioned section, “a president, secretary and treasurer, and such other officers and agents as shall he determined by the directors and managers.” These are the officers referred to as subject to removal in the subsequent clause of the section above quoted. By no reasonable construction of the language of the section can it be made to include the directors as subject to removal by the directors or managers. The directors of incorporated companies are the representatives of the stockholders selected by them under a right guaranteed by the constitution. Article XI of the constitution provides “that in all elections for directors or managers of incorporated companies every stockholder shall have the right to vote in person or by proxy the number of shares owned by him, ■for as many persons as there are directors or managers to be elected, or to cumulate said shares and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to- distribute them on the same principle among as many candidates as he shall think fit; and such directors or managers shall not be elected in any other manner.”- Clearly the object of this provision was to guard the rights of minority stockholders in corporations organised under the laws of this state. The legislature had this constitutional provision in mind in adopting our General Incorporation Act. The language of section 6 of the Act clearly discriminates the directors from the general officers of a corporation. Directors are charged with the exercise of the corporate powers and as a part of those powers may choose or appoint officers or agents, who may be removed by them when the interests of the corporation require. But the board of directors may not nullify the constitutional right of a' stockholder to choose whomsoever he may think proper to represent him on the board of directors. If a board of directors could legally remove a member either with or without a by-law, such as was adopted by the ¡National Hollow Brake Beam Company and under which the defendants were assuming to act, a power most dangerous to the minority stockholders would be lodged with the majority stockholders which would enable them through the action of the directors chosen by them to re-constitute the entire directory of a corporation as completely as if they owned every share of stock. This is not their right, nor have they this power, under the law of this state. We do not doubt that the complainant, being a director of the National Hollow Brake Beam Company, is an officer of that company in a broad and comprehensive sense, but he is not such an officer as is contemplated in that clause of the statute conferring the power of a motion.

In Cook on Corporations, vol. 2, sec. 711, the author says: “The term of office of director is usually fixed by the charter pf the corporation or the statutes applying to it. Such being the case, a director having been elected is entitled to hold his position until the expiration of his term of office. He cannot be turned out either by the stockholders, or the directors, or by a court. Sometimes, however, the charter, statutes or by-laws authorize and empower the stockholders to remove directors at any time.”

As we have seen no such power is given in the statute. If the board of directors of a corporation organized under the laws of this state have not the power to remove a director duly elected and serving, it has no power to adopt a by-law for that purpose. The section of the by-laws, therefore, under which the defendants were proceeding to remove the complainant is, in our judgment, void.

The fact that this section of the by-laws was adopted by a majority vote of all the stockholders of the company does not make it binding upon the complainant, by the principle of estoppel, for he is not shown to have participated in its adoption, or to have assented to it. Hence, People v. Sterling et al., 82 Ill., 457, cited by appellants, is not in point.

In People v. Higging, 15 Ill., 110, cited by appellants, the question was presented as to whether the trustees of the Illinois State Hospital for the Insane had the power to remove the medical superintendent of the institution, and it was held that the power was conferred, upon the board of trustees. «That, however, is a very different question from the one now under consideration, and the decision in that case cannot be regarded as an authority applicable to this case.

Without stopping further to discuss the authorities cited by appellants in detail it must suffice to say that they relate to different kinds of corporations from the one in question, or to the amotion of other officers than directors in a stock company, or decide different questions from those presented in the case at bar.

We entertain no doubt that a court of equity has jurisdiction to prevent the illegal action of the board of directors contemplated in the proceedings to remove complainant. If carried out to its final conclusion it would result in a continuing injury to complainant and a continuing deprivation of his right in the future to sit as a member of the board of directors. A court of equity has the authority to interpose by its restraining power, and to give the preventive relief proper in such eases. Brunnenmeyer v. Buhre, 32 Ill., 183.

The order granting the injunction is affirmed.

Affirmed.