4oo
THE GREEN BAG
on this branch of jurisprudence. But that such a relationship has been established in business practice is well known to every corporation lawyer. With the introduction of different classes of stock, with different rights and subject to different restrictions and liabilities, all the basis of contract, came a natural desire to contract with respect to the voting power. Each class of stock supposedly represented substantial interests, one supe rior in title, value, and equity to another, and having therefore a right to special pro tection. And so it seemed and is natural and proper that provision should be made to protect these interests and to give to one class under certain circumstances and conditions a superior voting power. It was also natural that, in granting the general power to make such provisions, the possi bility and extent of its abuse should not be recognized. And as a matter of fact the abuse of this power has been the exception and not the rule. Only exceptional induce ments or exceptional blindness can lead a man to place his money in a corporate enterprise without a voice in its manage ment and without a right under any cir cumstances to withdraw his investment. But that is just what has been and, so far as precedents show us, can be done by a proper use or abuse of the corporate organ ism. Many corporations have been formed having all the elements of a trust present in an eleemosynary corporation or in a savings bank, but without any of the statutory safeguards, and without any recognized power in the cestuis que trustent to with draw from the investment, or in the courts to cancel the trust. The simplest instance of such a corpora tion arises where A. and B. desire to place their money in a certain business under the management of C, and a corporation is formed by C. in which he takes a small relatively nominal amount of so-called pre ferred stock, with exclusive voting power, and A. and B. receive for their investment com
mon stock without voting power. The statutes of many states will be found on ex amination to authorize, expressly or by silence, such special provisions as to voting power to be inserted in the articles of incor poration, or even the by-laws, the corporate existence being perpetual and the power of amendment of the charter or by-laws being exclusively in the preferred voting class of members. It will be seen at once that A. and B. have no power under the statutes, the charter, or any recognized legal prece dents to dissolve the corporation, to gain control of their own property invested in it,' or to cancel the control given to C, while he on the other hand may mismanage their property without fear of losing control, or, if he desires, may sell his stock and right of control to the highest bidder.1 That such an arrangement constitutes a trust in fact, no one can or will deny. Prec edents are not needed to make it such — they cannot make it otherwise. This fact makes it necessary for us to examine very carefully the nature of such a trust to enable us to arrive at the correct principles which should govern its definition, existence, and control. For nothing could be more obnoxious to our jurisprudence than the idea that a trust can exist and not be subject to the power of chancery to regulate and, if necessary, destroy that existence.' 1 A further instance of the possibilities em braced in this class of corporations has come to the notice of the writer. It is that of a mining corporation, in which an issue of $100,000 socalled "founders' stock," issued gratis, is given the perpetual power to elect seven out of twelve directors, and to control assets represented by some $10,000,000 preferred and common stock. 1 In Hamlin v. Toledo, St. L. & K. C. R. Co. (C. C. A.) 78 Fed. 664, the preferred stock was "non-voting." Lurton, J., Taft, J., concurring, said, page 671; "They surrendered the privilege of voting. That was perhaps a valid agreement tetween stockholders, though of doubtful public policy. They thereby gave some additional value to the common sti ck. The latter was the exclu sive voting stock, and that was worth something as railway management now goes. The surrender of the right to vote does not make them creditors."
