Beatty v. North-West Transportation Co., (1886) 12 SCR 598

Supreme Court of Canada

Beatty v. North-West Transportation Co., (1886) 12 S.C.R. 598

Date: 1886-04-09

Henry Beatty, On Behalf of Himself and All Other Shareholders of the Defendant Company, Except the Defendants Other than the Company (Plaintiff) Appellant;

and

The North-West Transportation Company (Limited) and James Hughes Beatty (Defendants) Respondents;

and

William Beatty, Johned Ward Rose, Robert Laird and John D. Beatty (Defendants) Respondents.

1885: November 19, 20, 21; 1886: April 09.

Present: Sir W.J. Ritchie C.J., and Fournier, Henry, Taschereau and Gwynne JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Corporation—Sale by Director to Company—Ratification of by-law by shareholders—Vote of owner of property.

Where a director of a joint stock company procured the passage, by the board of directors, of a by-law authorizing the sale to the company of his own property;—

Held, that such by-law was illegal, and could not be ratified by the resolution of the shareholders of the company at a meeting subsequently called for the purpose of such ratification, which resolution was passed by a small majority obtained by the votes of the interested director.

APPEAL from a decision of the Court of Appeal for Ontario^[1], reversing the judgment of the Divisional Court^[2] in favor of the plaintiff.

The facts of the case, which are fully set out in the first report² may be briefly stated as follows:—

James H. Beatty, one of the directors of the North-West Transportation Company, had a boat called the “United

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Empire,” which he was desirous of selling to the company. In order to effect such sale he became the owner of more than half the shares of the company, a few of which he transferred to the defendants, Rose and Laird, and at the first annual meeting thereafter the said James H. Beatty, and the defendants Rose and Laird, were elected directors and constituted a majority of the board, which was composed of five.

The board passed a by-law authorizing the purchase by the company of the said boat, and a meeting of the shareholders was subsequently called at which such by-law was confirmed, the said James H. Beatty being present and voting for such confirmation. Without his vote the resolution could not have been passed as he himself voted on nearly half the stock of the company, the capital stock being 600 shares, and there was only a majority of seventeen in favor of the resolution.

The plaintiff Henry Beatty, one of the shareholders of the company who voted against the resolution to confirm the by-law, took proceeding on behalf of himself and the other dissentient shareholders to have the sale of the said boat to the company set aside, and a decree was made by the chancellor^[3] ordering it to be set aside. The Court of Appeal reversed this decree, holding that though the by-law was illegal the action of the shareholders was lawful, and effected a valid contract of sale. From this decision the plaintiff appealed to the Supreme Court of Canada.

Mowat Atty. Gen. for Ontario and McLennan Q.C. for the appellant.

This is a contest between J.H. Beatty and the other substantial shareholders of the company, none of whom had any interest in the property sold, and we seek to set aside the sale of the said Beatty’s boat on the ground that he was both vendor and vendee in such sale.

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There are two cases in which a majority cannot bind a minority, one where the matter in question is ultra vires of the company, and the other where it is a fraud upon the company.

The present case is sui generis and the transaction is against the policy of the law. Re Pepperell^[4].

The true rule to govern a case of this kind is laid down in Gregory v. Patchett^[5]; see also Gray v. Lewis^[6]; Menier v. Hooper Tel Works^[7]; MacDougall v. Gardiner^[8]; Mason v. Harris^[9]; re London and Mercantile Discount Co.^[10]; Pender v. Lushington^[11]; East Pant du Mining Co. v. Merryweather^[12].

The conduct of Beatty was most inequitable in forcing a sale of his property upon an unwilling minority, and the court will not permit a majority to act inequitably whether their conduct can be called fraudulent in the ordinary sense or not.

Then again the extent of the transaction must be considered. The shareholders may sanction a moderate payment, but not a large one. Tennant v. Trenchard^[13].

The transaction placed Beatty in a position inconsistent with his duty as a president, manager and director of the company. Davidson v. Tulloch^[14].

There is authority for setting aside such sale, even if made by an outsider. See ex parte Chippendale, Re German Mining Co.^[15]

Then it is submitted that under the statute incorporating the company only the board of directors could make a contract of this kind, and the shareholders in general meeting had no power over it. If the board had

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made the contract, shareholders could not annul it. Then the converse is true. See 32 and 33 Vic. ch. 13 ss. 15, 16 and 22. Aberdeen Ry. Co. v. Blakie^[16].

The following cases were also cited: Foster v. Oxford, &c., Ry. Co.^[17]; Panama, & c., Tel. Co. v. India Rubber, &c., Tel Works Co.^[18]

Robinson Q.C. and MacDonald Q.C. for the respondents.

One always distrusts the assertion of a rule to prevent fraud, when coupled with a refusal to enter upon the question whether there is fraud in the matter or not. And here plaintiffs charged fraud in their bill and abandoned it on the hearing

According to the contention of the appellants any measure could be defeated in which a party holding shares is interested. If so, what degree of interest would be required? A matter of principle does not admit of degrees, and therefore the slightest possible interest would be sufficient. We agree that the minority should be protected against the operation of fraud, but not on a mere technical rule against the interests of the company.

The question is, whether or not a shareholder is prevented from voting upon a question in which he has a present interest.

See Lindley on Joint Stock Companies^[19]; Stevens on Joint Stock Companies^[20], and Thring on Joint Stock Companies^[21].

A shareholder, in a meeting of shareholders, is not a trustee for anybody. He can do acts upon his shares which he could not do as a director. When he comes to the meeting of shareholders, his fiduciary character is gone.

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It is clear that J.H. Beatty could have distributed his stock among his friends and the same result would have been reached without the posibility of being questioned.

In Lushingtons case that was allowed in spite of a provision that the voting power of the stock should be limited and by the distribution the limit was excepted.

In re Stranton Iron and Steel Company^[22], was a strong case to the same effect.

I would refer also to Atwool v. Merryweather^[23]; Erlanger v. New Sombrero Phosphate Co.^[24] I read this to rebut the contention that a case of this tenor and effect is shocking to the moral sense

Cumberland Coal Co. v. Sherman^[25]; Imperial Credit Ass. v. Coleman^[26].

And, as bearing on the general principle, we cite Gregory v. Patchett^[27], which is a very clear illustration of what a majority can do. Faulds v. Yates^[28]; East Pant du Mining Co. v. Merryweather^[29].

Pender v. Lushington, cited by my learned friends, has not the least bearing upon the right of a shareholder to vote when interested.

The distinction between a shareholder and a director is pointed out in the case of Smith v. Anderson^[30], and that between a trustee and a director in Re Denham^[31]; Flitcroft’s Case^[32].

If the shareholders could deal with this matter the action of the directors is immaterial. MacDougall v. Gardiner^[33]; Great Luxembourg Ry. Co. v. Magnay^[34]; Mason v. Harris^[35]; Menier v. Tel. Co.^[36]

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Mowat Q.C., Attorney General, in reply.

The case of Great Luxembourg Ry. Co. v. Magnay decides that a director of a company is a trustee. And the case of Bowes v. City of Toronto^[37] decided that even a member of a municipal council is a trustee.

There are many other cases besides that of fraud where personal interest disqualifies.

Pender v. Lushington does not decide that shares may be distributed and votes used for all purposes.

Sir W.J. RITCHIE C.J.—Though it may be quite true, as a general proposition, that a shareholder of a company, as such, may vote as he pleases, and for purposes of his own interest, on a question in which he is personally interested, does that proposition necessarily cover this case? Is it not abundantly clear that, whatever a simple stockholder may do, no director is entitled to vote, as a director, in respect to any contract in which he is personally interested? Directors cannot manage the affairs of the company for their own personal and private advantage; they cannot act for themselves and, at the same time, as the agents of the corporation whose interests are conflicting; they cannot be the sellers of property and the agents of the vendee; there must be no conflict between interest and duty; they cannot occupy a position which conflicts with the interests of the parties they represent and are bound to protect. Is it not somewhat of a mockery to say that this by-law and sale were invalid and bad, and not enforceable against the company as being contrary to the policy of the law by reason of a director entering into the contract for his personal benefit where his personal interests conflicted with the interests of those he was bound to protect, but that it can be set right by a meeting of the shareholders, by a resolution carried by

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the vote of the director himself against a large majority of the other shareholders? If this can be done how has the conflict between self-interest and integrity ceased?

While recognizing the general principle of non-interference with the powers of the company to manage its own affairs, this case seems to me to be peculiarly exceptional; a director, acting for the company, makes a sale, acting for himself, to the company, a transaction admittedly indefensible; this purchase is submitted to the shareholders, and the director, having acquired a controlling number of votes for this purpose, secures a majority by his own votes thus obtained without which the purchase would not have been sustained, and confirms as a shareholder his invalid act as a director, and thus validates a transaction against which the policy of the law utterly sets its face.

It does seem to me that fair play and common sense alike dictate that if the transaction and act of the director are to be confirmed it should be by the impartial, independent, and intelligent judgment of the disinterested shareholders, and not by the interested director himself who should never have departed from his duty. If he had done his duty and refrained from acting in the transaction as a director the by-law might never have been passed, and the contract of sale never entered into; and having acted contrary to his duty to his co‑shareholders he disqualified himself from taking part in the proceedings to confirm his own illegal act; and then to say that he was a legitimate party to confirm his own illegal act seems to me simply absurd, for nobody could doubt what the result in such a case would be, as the futileness of the interested, but discontented shareholders attempting to frustrate the designs of the interested director with his majority is too manifest; but he, if he had done his duty towards them and refrained from entering into the transaction,

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would never have been in the position of going through this farce of submitting this matter to the shareholders, and when so submitted of himself voting that he, though he had acted entirely illegally, had done right, and thereby binding all the other shareholders who thought the purchase undesirable; or in other words, by his vote carrying a resolution that the bargain he himself had made for the company as buyer, from himself as seller, was a desirable operation and should be confirmed.

I cannot distinguish this case in principle from Erlanger v. The New Sombrero Phosphate Co.^[38], in which a sale by promoters of a company was made to the company. Lord Penzance thus states the general doctrine:

The principles of equity to which I refer have been illustrated in a variety of relations, none of them perhaps precisely similar to that of the present parties, but all resting on the same basis, and one which is strictly applicable to the present case. The relations of principal and agent, trustee and cestui que trust, parent and child, guardian and ward, priest and penitent, all furnish instances in which the courts of equity have given protection and relief against the pressure of unfair advantage resulting from the relation and mutual position of the parties, whether in matters of contract or gift; and this relation and position of unfair advantage once made apparent, the courts have always cast upon him who holds that position the burden of showing that he has not used it to his own benefit.

And Lord Cairns, speaking of the duty of promoters of a company, makes these observations:

It is now necessary that I should state to your lordships in what position I understand the promoters to be placed with reference to the company which they proposed to form. They stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company; they have the power of defining bow, and when, and in what shape, and under what supervision it shall start into existence and begin to act as a trading corporation.

If they are doing all this in order that the company may, as soon as it starts into life, become, through its managing directors, the

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purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the promoters to take care that in forming the company they provide it with an executive, that is to say, with a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made. I do not say that the owner of property may not promote and form a joint stock company and then sell his property to it, but I do say that if he does he is bound to take care that he sells it to the company through the medium of a board of directors who can and do exercise an independent and intelligent judgment on the transaction, and who are not left under the belief that the property belongs, not to the promoter, but to some other person.

The following American cases, also, contain the same doctrine. Ogden v. Murray^[39].

Grrover J.:

This brings the case within the rule, which rests in the soundest wisdom, and is sustained by the best consideration of the infirmities of our human nature, and called for by the only safe protection of the interests of cestui que trust, or beneficiaries, viz., that trusties, and persons standing in similar fiduciary relations, shall not be permitted to exercise their powers, and manage or appropriate the property, of which they have control for their own profit or emolument, or, as it has been expressed, “shall not take advantage of their situation, to obtain any personal benefit to themselves at the expense of their cestui que trust.”

This by no means assumes that the trustees were not, in this case, in the actual exercise of the highest integrity. I cannot for a moment doubt that, in reference to the particular case before us; but the principle is one of great importance, and it forbids any inquiry into the honesty of a particular case.

In Mathew Ryan et al v. The Leavenworth, &c., Railway Co.^[40] Horton C.J. says:

This contract was secured, through the votes and influence of members of the directory, who were directly interested in the procurement of such contract; and, the president of the corporation, in executing the same, while nominally representing the corporation, was really acting adverse to its interests and the interests of its stockholders and in the promotion of gain to himself and his co-

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partners. The elementary text books of authority, on the subject of corporations, lay down the rule that the fiduciary character of directors is such that the law will not permit them to manage the affairs of the corporation for their personal and private advantage when their duty would require them to work for and use reasonable efforts for the general interests of the corporation and its stockholders and creditors. The directors are the primary agents of the corporation and this relation requires of them the highest and most scrupulous good faith in their transactions for the corporation; and the general rule, that no trustee can derive any benefit from dealing with these funds of which he is a trustee, applies with still greater force to the state of things in which the interest of the trustee deprives the corporation of the benefit of his advice and assistance.

In European and North American Railway Co. v. Poor^[41], Appleton C.J. says:

The underlying principle is that no man can serve two masters. He who is acting for others cannot be permitted to act adversely to his principals. The agent to sell cannot become a purchaser of that which he is the agent to sell, for his position as selling agent is adverse to and inconsistent with that of a purchaser. So, the agent to purchase cannot, at the same time, occupy the position of a seller. It is not that in particular instances the sale, or the purchase, may not be reasonable, but to avoid temptation, the agent to sell is disqualified from purchasing and the agent to purchase from selling. In all such contracts the sales or the purchases may be set aside by him for whom such agent is acting. The cestui que trust may confirm all such sale on purchases, if he deems it for his interest.

* * *

The president and directors of a corporation must be held as occupying a fiduciary relation to the stockholders for and in behalf of whom they act. “The relation between the directors of a corporation and its stockholders,” observes Johnson J., in Butis v. Wood^[42], “is that of trustee and cestui que trust.” “The directors,” remarks Romilly, master of the rolls, in the York and Midland Railway Co. v. Hudson^[43], “are persons selected to manage the business of the company for the benefit of the shareholders.” It is an office of trust, which, if they undertake, it is their duty to perform fully and entirely. Person, who become directors and managers of a corporation, place themselves in the situation of trustees; and the relation of trustees and cestuis que trust is, thereby, created between them and the

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stockholders, Scott v. Depeyster^[44]. All acts done by the directors officially should be for the interest of the cestuis que trust. Holding a fiduciary relation they cannot be permitted to acquire interests adverse to such relation.

In Coleman et al. v. Second Avenue Railroad Co.^[45] Grover J.:

That the grantees, directors, acting as directors and composing a majority of the board, could not make a bargain with themselves as individuals, binding upon the company to purchase their grant upon the term fixed by them as directors, is a point already determined by this court in Butts v. Wood^[46]. If they could not as directors make such a contract obligatory upon the company, they could not by their acts as a board bind the company to pay them any specific sum for their grant.

In Wardell v. Railroad Co.^[47]

Field J.:

It is among the rudiments of the law that the same person cannot act for himself, and, at the same time, with respect to the same matter, as the agent of another whose interests are conflicting. Thus, a person cannot be a purchaser of property, and, at the same time, the agent of the vendor. The two positions impose different obligations and their union would, at once, raise a conflict between interest and duty; and “constituted as humanity is, in the majority of cases, duty would be over borne in the struggle,” Marsh v. Whitmore^[48]. The law, therefore, will always condemn the transactions of a party in his own behalf, where, in respect to the matter concerned, he is the agent of others, and will relieve against them whenever their enforcement is seasonably resisted. Directors of corporations, and all persons who stand in a fiduciary relation to other parties, and are clothed with power to act for them, are subject to this rule: they are not permitted to occupy a position which will conflict with the interest of parties they represent and are bound to protect. They cannot, as agents or trustees, enter into or authorize contracts on behalf of those for whom they are appointed to act, and, then, personally participate in the benefits.

In Spering’s Appeal^[49], Sharswood J. says:

In Williams v. Page^[50], Sir John Romilly said, in treating a director as a trustee: “The trust is no doubt a peculiar one.” In

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Great Luxembourg Railway Co. v. Magnay^[51], he held that if a director enters into a contract for the company he cannot personally derive any benefit from it. So, also, in ex parte Bennett^[52], directors of a public company are trustees for the shareholders and their private interests must yeild to their public duty wherever they are conflicting. In Turquard v. Marshall^[53], which is the last English case on the subject, Lord Romilly, master of the rolls, held directors liable, first, for not calling a meeting of the shareholders, under a clause of the charter requiring them to do so, on the exhaustion of their surplus fund, and, second, for loaning money, to one of themselves, without security, He used however this language: “That if directors have been guilty of gross and palpable breach of trust, which cannot be set right by a public meeting of the company, they may be made responsible for their misconduct.”

In Port et al. v. Russell et al.^[54], Buskirk J. says: The question presented for our consideration and decision is, can a director, in an incorporated company, become a contractor with the company, or can he have any personal and pecuniary interest in a contract between the company of which he is a director and a third person? We think the law is well settled, both in England and in this country, that he cannot. In the case of The Aberdeen Railway Company v. Blaikie^[55], the house of lords, reversing the judgment of the Court below, held that a contract entered into by a manufacturer for the supply of iron furnishings to a railway company, of which he was a director or the chairman at the date of the contract, was invalid and not enforceable against the company. Lord Cranworth in delivering the opinion of the court, says: “A corporate body can only act by agents and it is, of course, the duty of those agents so to act as best to promote the interest of the corporation whose affairs they are conducting. Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has, or can have, any personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far, in any particular case, the terms of such a contract have been the best for the cestui que trust which it was impossible to obtain. It may some

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time happen that the terms upon which a trustee has dealt, or atetmpted to deal, with the estate or interest of those for whom he is a trustee, have been as good as could have been obtained from any other person; they may, even, at the time, have been better, but still, so inflexible is the rule, that no inquiry on that subject is permitted. The English authorities on this subject are numerous and uniform.”

The three leading cases in this country are Michaud v. Girod^[56]; Coal and Iron Company v. Sherman^[57]; and the Hoffman Steam Coal Company v. Cumberland Coal and Iron Company^[58]. In these cases will be found a full, able and exhaustive discussion of the question and a thorough examination of the English and American cases.

If this is so as regards promoters, why should it not apply with equal force to directors and shareholders selling to the company? This sale was not made through the medium of aboard of directors who would, could and did exercise an independent and intelligent judgment on the transaction, and it will be a bold man who will say that Mr. Beatty, either as a director or shareholder, was a competent and impartial judge as to whether the purchase ought or ought not to be made.

In my opinion, the whole policy of the law is against the recognition of such a transaction as this, which, if permitted, would open a door by which directors would be enabled successfully to subvert that wise rule which prevents a party from being at the same time buyer and seller, to the injury and wrong of dissatisfied shareholders, and whereby directors recreant to their duty may illegally benefit themselves at the expense of those whose interests it is their duty to protect by forcing the property on unwilling purchasers on their own terms, thereby subverting the commonly received idea, and treating as a vulgar error the ordinarily received notion, that it requires two to make a bargain.

I think it is clear in this case that the defendant, a

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director, by his action as director, and by means of the majority secured by his own vote, obtained a benefit for himself at the expense of the minority, the rest of the shareholders. It may possibly be that the act of Mr. Beatty as a director in obtaining the passage of this by-law and making this sale and obtaining a sufficient number of votes to enable him thereby to carry a resolution, at a meeting of the shareholders, to confirm such sale, and by reason thereof ratifying and confirming the sale, may not be properly characterized as fraudulent; if not actually fraudulent it was, in my opinion, an illegal and oppressive proceeding on his part whereby the minority of shareholders were overreached and deprived of their right, and therefore the transaction was such a one as such a majority could not confirm and as should not be sustained in a court of justice.

I rest this case entirely on the position Beatty held as a director and the duty which pertained to that office. In that view it is not necessary to discuss how far, or rather under what circumstances a shareholder may vote at a general meeting of shareholders on matters on which he is individually interested. I cannot, however, but look upon it as rather a bold and startling proposition that a shareholder should be able to offer a property for sale to the company from a bare majority of votes and by such vote, against the will of all the other shareholders, compel the company to become the purchaser at his own price and on his own terms, against the wish of all the other shareholders who may, as in this case, be a minority of 289 votes against 306.

FOURNIES J.—I entirely agree, for the reasons given by the learned Chancellor, that the appeal should be allowed.

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HENRY J.—I concur in the decision of my learned brothers. In the first place, it involves a decision as to whether or not a shareholder has a right to vote on a matter in which he is personally interested, because, if he had such a right, then he could vote for this sale. I think it is competent for a shareholder so to vote at a meeting properly called. But this case does not depend upon that, because, in my opinion, the by-law passed by the directors was improperly passed and could not be confirmed by the shareholders.

I may have no reason to suppose that Beatty did not consider it in the best interests of the company that they should become the owners of his vessel, and the evidence is favorable on that point; and without attributing any intentional wrong to him, we may inquire whether the by-law was, independent of that consideration, valid.

The decision of the directors in favor of the by-law was obtained by the votes of the party who was selling the property. It is well settled that the same party cannot be buyer and seller; a director of a company has a fiduciary character, and he is bound to exercise his functions in the best interests of the company. Where he is himself personally placed in interest in antagonism to the company, his acts are to be considered illegal. The by-law was, in this case, the foundation of the resolution of the shareholders; the directors would not have passed it, but for the vote of the party who was interested in making the sale. The shareholders would not have confirmed the by-law if Beatty had not purchased sufficient additional shares to give him a majority of the votes, so that, by his own act he occupied such a position as director and shareholder as enabled him to deal altogether in his own interests. Now this, if such were tolerated, would enable any person who intended to wrong a company to compel

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them to purchase, at an exorbitant price, property of which he was the owner. To sanction the exercise of such a power would be dangerous and wrong. I think the sale in this case was illegal, and the judgment of the court below should be reversed with costs.

TASCHEREAU J.—I am of the same opinion

GWYNNE J.—The defendant, James Hughes Beatty, being the owner of 301 out 600 shares which constituted the whole capital of the North-West Transportation Company, and having built a steamship called the United Empire on the speculation of disposing of it to the company and being desirous of selling it to the company of which he was also a director, adopted the following mode of accomplishing his purpose. On the morning of the 7th February, 1883, on which day a general annual meeting of the shareholders was to be, and was, held, he assigned five of those shares to the defendant Laird and five to the defendant Rose who thereby became qualified to be elected directors of the company At the shareholders meeting of that day, a proposition was made by, or on behalf of the defendant James Hughes Beatty, that the company should become purchasers of the steamship, and the price at which the defendant would sell it was mentioned and a resolution was put to the meeting and carried, that a by-law of the company for the purpose of authorizing the purchase embodying the proposed terms, should be prepared and submitted to a special meeting of the shareholders to be convened on the 16th day of the said month of February, for the purpose of considering the same, and of authorizing or declining to authorize the purchase. At this meeting of the 7th February, the defendant James Hughes Beaty, William Beatty, Rose and Laird were elected directors of the company, and at a meeting of those directors, subse-

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quently held between that day and the tenth of the same month, the defendant, James Hughes Beatty, was elected president, the defendant, John Beatty, besides being a director continued to fill also the office of secretary-treasurer, which office he held from the first organization of the company.

At a meeting of directors held on the 10th of February, 1883, a by-law was prepared and approved of by the board for the purpose of being submitted to the special meeting of shareholders to be held on the 16th February, in pursuance of the resolution of the 7th of that month.

This by-law was as follows:

Whereas in consequence of the loss of the steamer Asia and depreciation through wear and tear of the value of other steamers belonging to the company, the capital of the said company has been impaired and the carrying powers of the said company reduced, and it is therefore considered essential, in the interest of the company, and to maintain its efficient working, to purchase a steamer to replace the said steamer Asia. And whereas it has been agreed between the company and James Hughes Beatty, Esq., one of the directors of the said company, that the said company should buy, and the said James Hughes Beatty should sell to them, the steamer United Empire for the price or sum of one hundred and twenty-five thousand dollars to be paid as follows:—Twenty thousand dollars in cash, and five thousand within five months from the date hereof, secured by promissory note of the company, with interest at seven per cent., and the balance in three equal payments on the first days of December 1883, 1884 and 1885, with interest at seven per cent. per annum on unpaid purchase money with privilege to the company to pay off the purchase money at any time or times, in sums of not less than $5,000, the said balance to be secured on the assets of the company hereinafter set forth. Therefore the North-West Transportation (limited) enacts as follows:—

That the said company purchase from the said James Hughes Beatty, the said steamer at and for the said price or sum of one hundred and twenty-five thousand dollars payable and secured as hereinbefore recited.

That the president is hereby authorized to affix the seal of the company to a mortgage to the said James Hughes Beatty, on the following assets: The steamer, United Empire, Manitoba, Ontario and Quebec, to secure payment of the balance of one hundred

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thousand dollars, according to the terms hereinbefore recited and provided for the amount of unpaid purchase money as additional security.

That for the purpose of making the cash payment, the treasurer of the company may apply any funds in hand, which are not immediately needed for working expenses, and may borrow from any person or corporation on the credit of the company, such sum as may be necessary to make up the balance of the said cash payment.

On the 16th February the special meeting of shareholders was held at the office of the company in Toronto, for the purpose of considering the above bylaw, and of adopting or rejecting the same, which meeting was attended in person or by proxy by the holders of 595, out of the total number of 600 shares, constituting the capital of the company, and as appears by the following extract taken from the minutes of the meeting, the following proceedings took place:

The by-law, for the purchase of the steamer United Empire was submitted to the shareholders and read by the secretary, as also the agreement of Mr. James H. Beatty in the sale and completion of the said steamer, the said by-law having been passed by the directors at their meeting on the 10th instant, and said agreement having been executed the same day. The matter having been fully and freely discussed, it was moved by Mr. Laird, seconded by Mr. Rose, “that the by-law passed by the directors for the purchase of the said steamer be now confirmed” Mr. James H. Beatty stating the $125,000 is the actual cost of the boat, including $4,000 for superintendence, $800 for expenses and interest on advances, and that he will lay before the board a detailed statement of cost including the above items, and will credit on said $125,000 any sum by which said cost shall not equal said $125,000, the company agreeing to pay any excess, such excess to be added to the $100,000 as mentioned in the by-law, and paid in three equal payments with said sum—The vote having been taken by shares, it was declared carried, and the by-law thus adopted.

Objections to the adoption of the by-law were made by Mr. Hankey (who held 71 shares), as follows:—

1. No necessity for the purchase of a new vessel.

2. The valuation of the “United Empire” is excessive and unfair, and considering the extent of Mr. James H. Beatty’s interest, such valuation should have been submitted to outside and disinterested

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arbitration.

The defendant, James H. Beatty, upon the vote for the adoption of the by-law gave 291 votes, which together with fifteen other votes, given by three of the other directors constituted the whole number, namely, 306 votes given in favour of the by-law, and the purchase of the steamer. The votes given against the bylaw and the purchase were 289 in number. The by‑law was thus carried, and the purchase made by the votes of the defendant, James H. Beatty himself alone, acting in the double and conflicting characters of vendor and vendee. The defendant could no more in this character act in such double and conflicting characters than he could as a director. He can no more, by his possession of 291 shares out of 600, compel the holders of other 289 shares to purchase his property against their will at his price, at a meeting of shareholders than he could do so, by his casting voice at the board of directors. The question is not as to the right of courts of justice interfering with the exercise by a shareholder in a company of his right of voting, which is incident to the possession of his shares, upon the ground of his having an interest in the matter upon which the votes are taken, different from that of the other shareholders, but as to the right of one shareholder in a company to use his controlling votes, to the exclusion of all shareholders dissenting from him, for the purpose of assuming to represent the company, and in its name to contract with himself for the purchase of his own property, on his own terms.

The question, in short, simply is whether a valid contract has been entered into by the company with the defendant, James Hughes Beatty, for the purchase from him of the steamer United Empire. Now to every valid contract of sale, there must be two perfectly independent parties—the vendor and the vendee, if the

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latter be so under the control and influence of the former that the latter’s assent to the purchase is obtained only by force of such control and influence, there is no valid contract, the assent of the vendees being given under compulsion of the vendor is no consent, and(there is no contract for the want of two assenting minds. Now this is exactly what has taken place here. The vendor while going through the form of submitting to the general body of independent shareholders the question whether the purchase shall be made or not, lays aside for a time his character of vendor and assumes that of vendee, and by force of his controlling number of votes neutralises the votes of all the independent shares, which are given against the purchase in the proportion of 289 to 15, and so the vendor, in the name of the company and assuming to act for it and to bind it, contracts with himself for the purchase of the vessel from himself, on his own terms and mortgages the whole of the assets of the company to himself to secure payment of the purchase money. It is impossible that such a transaction can be maintained; it is precisely such a one as comes within the designation of illegal oppression and (in the eye of a Court of Equity) fraudulent to use the language of Lord Justice James in MacDougall v. Gardiner^[59]; but no such question arises here as did in that case which was, as to the sufficiency of the frame of the bill. In the present case, the statement of claim contains all the necessary averments in explanation of its being filed, not in the name of the company as plaintiff, but by the shareholder on behalf of himself, and all other shareholders who are prejudiced by the wrongful exercise by the defendant, James Hughes Beatty, of his controlling influence to consummate in the name of the company a transaction with himself, which is illegal and in the eye of a court

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of equity fraudulent.

That the three directors who gave the fifteen votes in favour of the purchase, which were the only votes so given except those of the vendor, did so in the belief and conviction, that the purchase was in the best interests of the company, and a fair and honest one, I do not entertain a doubt, and it may be that the defendant, the vendor himself, entertained the same belief, but his entertaining that belief is altogether beside the question and can afford no excuse for his assuming to bind the company as vendees, and in the name of the company to contract with himself as the vendor.

The case of East Pant Du United Lead Mining Co. v. Merryweather^[60], which was much relied upon in the Court of Appeal for Ontario, in support of this sale by the defendant vendor, to the company assenting thereto, only through the vendor assuming to bind them, is very distinguishable from the present case. There a bill had been filed in the name of a company as plaintiff’s, alleging that a contract for the purchase of a mine on the part of the company had been fraudulently obtained by the defendant Merryweather and was void, and that he was not entitled to 600 shares, which had been allotted to him in respect of it, and praying that the purchase of the mine might be set aside, and the money returned to the shareholders who had advanced it. The defendant, Merryweather and two directors who sided with him, moved the court that this bill should be taken off the file on the ground that there had been no resolution of any majority of the shareholders authorizing the use of the company’s name for that purpose, and that it was a bill filed without the sanction of the company.

The vice chancellor thought that the proceedings ought not to be stayed until the shareholders should

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have an opportunity of expressing their opinion as to whether they would adopt the bill or not, and the motion was ordered to stand over for that purpose An extraordinary general meeting was accordingly held for that purpose and after a protest had been made at the commencement of the proceedings against Merry-weather’s presence, and right to vote, a motion was made for the adoption of the bill, this was met by an amendment to refer all matters in difference between the shareholders and Merryweather to arbitration and to stay all proceedings. Upon a poll being taken the amendment was carried by a majority of twenty votes. 78 of the votes given for the amendment were given by Merryweather, so that if these should be excluded, the motion in adoption of the bill would have been carried.

In this state of things the motion to take the bill off the file as not being authorized by the company was renewed, and the only question was, whether a bill could be filed in the name of the company by a minority of the company, charging fraud against some of the majority, and alleging that these persons were not to be considered as shareholders or entitled to vote. The question was one as to practise and pleading. The late Sir John Rolt, who was counsel, making the motion, admitted that a bill might have been framed though not in the name of the company as plaintiffs. The single question before the vice chancellor Sir W. Page Wood was: “Had the company sanctioned the suit? To “decide,” says the learned vice chancellor, “that it has “done so, would be to discard Mr. Merry weather’s “votes and to do that, would in effect be to decide now “on this application the question at issue in this suit.”

The question raised by the bill was, whether the contract, in virtue of which alone, Merryweather acquired the shares, was valid or not. To discard the

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votes would have been in effect to pronounce the contract to have been invalid, a point not raised by the motion to take the bill off the file, and so, on such a motion, to decide a point only put in issue by the bill. There was no alternative left but to order the bill to be taken off the file and to leave the objecting shareholders to frame their bill on their own behalf, and not in the name of the company as plaintiffs, as it was admitted by Sir John Holt in argument, they might have done.

So in Pender v. Lushington^[61] the plaintiff Pender was the registered holder of 1,000 shares in the Direct United States Cable Company, he was also the chairman of the Globe Telegraph and Trust Company, which was worked in connection with the Anglo American Telegraph Company. On the 2nd February, 1877, an extraordinary general meeting of the company was held, pursuant to notice, at which Pender moved a resolution in these terms:—

That it is expedient to put an end to the present antagonism of this company towards the Anglo American Telegraph Company and its connections, and to work this company’s cable in friendly alliance with their lines; and that a committee of shareholders be appointed to be named by the meeting to confer with the directors as to the best method of giving effect to this resolution, and to report to the shareholders at such time as the meeting shall appoint.

This resolution was seconded and put to the meeting whereupon an amendment was moved by a shareholder, and was seconded and put to the meeting by the chairman and declared to be carried. A poll being demanded by Mr. Pender, the meeting was adjourned to the 5th February, when the poll should be taken. At the adjourned meeting it appeared from the report of the scrutineers that according to the number of votes recorded, there would have been a majority of votes against the amendment, but the chairman ruled out

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649 votes and declared the amendment carried by a majority of 609. Mr. Pender then moved a second resolution, and the votes were again taken, and the resolution would have been carried, but the chairman ruled out the same votes as before, and it was accordingly lost. The grounds on which the chairman ruled out these votes, were that they were given in respect of shares, which had been transferred by certain large shareholders in the Direct United States Cable Company and with the object of increasing the voting powers of the transferors, and of furthering the view of the Globe Telegraph and Trust Company. These shares had been duly transferred to their present holders three months before the meeting was held according to article 59 of the articles of association, and the names of the holders were on the register. An action was then brought by Pender on behalf of himself and all the other shareholders of the Direct United States Cable Company, who voted against the amendment to the first resolution, and in favour of the second resolution at the said meetings and the said company as plaintiffs against Lushington and others, the directors of the same company as defendants. A motion was then made on behalf of the plaintiffs, to restrain the defendants from ruling out the 649 votes, and acting contrary to the second resolution, until the hearing of the action. Now, the question involved in this motion was simply whether the fact of the plaintiff having an interest in another company, and which the defendants and those acting with them had not, which special interest of the plaintiffs constituted the motives of their actions made illegal the transfer of shares by the plaintiffs to their own nominees, having otherwise no interest in the company, for the purpose of thereby increasing the voting power of the plaintiff, and which transfer of shares was in other respects within the provisions of the articles of asso-

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ciation, and whether the plaintiff, by reason of his interest in the other companies, was deprived of the right to have the votes of the transferees of shares counted on the poll which was taken.

This is the question to which the observations of the master of the rolls, Sir George Jessel, applies, when he says:

If these shareholders have a right of property, then I think all the arguments which have been addressed to me as to the motives which induced them to exercise it are entirely beside the question “and again” there is, if I may say so, no obligation on a shareholder of a company to give his vote merely with a view to what other persons may consider the interests of the company at large. He has a right if he thinks fit, to give his vote from motives or promptings of what he considers his own individual interest “and again.” I am not going to give any opinion as to what the effect of the resolutions may be, when passed. The only point on which I am asked to decide is to say they ought to have been passed, in other words, that there was a majority for them, and to restrain the defendants until further order from acting in contravention of them.

Now, if the only question in the present suit was merely whether the fact that the defendant James Hughes Beatty had a special interest in the adoption of the question, submitted to the meeting, which the other shareholders had not, deprived him of the right of voting on the question this case might be referred to as an authority that it did not, but the question in the two cases are very different, and it is the difference in the questions voted upon and the conflicting nature of the interests and the opposing character of the positions, which the defendant assumed to represent and act in, and not the mere fact of his having an interest different from that of the other shareholders which makes the difference. In Pender v. Lushington the question was merely upon which side was the majority of votes in point of fact given without any enquiry as to the effect of the resolution; in the present case, the question is, as to the effect of a resolution carried by the sole con-

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trol of a vendor of a chattel, who assumed to act also in the character of vendee, and insists upon his right of thus perfecting as valid, a contract made by himself as representing the company, in which he is as shareholder and director, with himself as vendor of the chattel for the purchase of his property upon his own terms. 80 likewise the case of Mason v. Harris^[62], relied upon in support of the judgment of the Court of Appeal supports the contention of the appellant. Whatever may have been the motive of the defendant in forcing his steamer upon the company, or in attempting so to do, namely whether he did or did not bonâ fide, believe it to be the interest of the company, to acquire the steamer on the terms named, the transaction is no less one in which the defendant assumed to fill the inconsistent and conflicting positions of vendor and vendee, and by reason thereof the essential condition to the creation of a valid contract was wanting.

The appeal therefore must be allowed with costs, and the judgment of the learned chancellor must be restored.

Appeal allowed with costs.

Solicitors for appellants: Mowat, MacLellan, Downey & Langton.

Solicitors for respondents: MacLaren, McDonald, Merritt & Shepley.