Keenan vs Eshleman

1938 Mara
SUMMARY: Corporate funds have been misappropriated to pay for the salaries of officers, subsequently ratified by the shareholders after 3 years. The minority brought a charge for damages and won the suit. Appeal here is to question whether the minority who filed shall be the only ones to enjoy the claim of damages. The court rules otherwise, since the action is a derivative suit brought in behalf of the company. DOCTRINE: The action here is a derivative one, brought on behalf of the corporation and the complaint and defenses are to be considered as though it was the corporation itself suing the defendants. FACTS: HA tone and Company, is a corporation which was organi!ed in "#"$ for the purpose of financing small companies in need of financial assistance. %ts plan was to sell on behalf of any company it has accepted as client an issue of the latter&s preferred shares. tone organi!ed and owned all the shares of 'eneral tabili!ing and 'uaranty (und which although having no assets made a practice of underta)ing to guarantee the payment of dividends of the preferred shares of the client companies of tone. anitary Company of America was one of these client companies. %n "#*+ tone and 'eneral failed, and their assets which consisted of shares of common stoc) of anitary were transferred to Consolidated ,anagement Association. All these shares were somehow transferred to -eena and .rewer who controlled Consolidated as voting trustees and controlled anitary by reason of the fact that Consolidated owned a majority of the voting shares of anitary. The directors of anitary issued resolutions granting -eenan and .rewer to be paid /*+,+00 per year, same as that of the director, even if they were only officers and employees. There were also other substantial bonuses involved. ,inority shareholders filed a bill for accounting for this issue but after three of it being pending, the ratification of the director&s resolution in giving bonuses 111 pushed through. ,inority shareholders of anitary filed a derivative suit and won claims for damages. ISSUES/HELD: ". 234 the damages collected should go only to the minority who filed the derivative suit or should it go towards the entire corporation. RATIO:

The appellants claim that only those minority shareholders who had not acquiesced in the ratification should be given a share in the recovery. %t was opined by the Chancellor, that if that were to be the case then the suit would be transformed by the decree to one see)ing individual redress. The lower court observed that while the bill asserted a cause of action which was essentially derivative from the company itself, yet that distribution of the amount recoverable could be properly made to plaintiffs and that it was not necessary that the money be paid into the treasury of the company and then redistributed, since shareholders other than the plaintiffs have assented to the defendants acts. This court however rules that the misappropriation was a fraud on anitary, act which the directors could not have authori!ed, and the stoc)holders ratified. To allow the defendants to retain a part of the misappropriations in proportion to the stoc) interest of the ratifying stoc)holders would be to permit ratification of illegal acts to that e5tent. %n the circumstance that it was ultra vires, the corporation, its directors, and its stoc)holders would be deprived, and to the defendants, it would be a gift. The action here is a derivative one , brought on behalf of the corporation and the complaint and defenses are to be considered as though it was the corporation itself suing the defendants. %f the misappropriation is to be regarded as a fund for a dividend which the dissenting stoc)holders are to share then they result is a subterfuge violative of equity. %ts an old saying that one should be just before being generous and this common sense truth is especially applicable to stoc)holders who, for one reason or another, are willing to condone a wrong done to their corporation and themselves. They cannot be generous with the corporation&s money but they of course, may be generous as they please when the money had become their own.