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167 ROSS TRANSPORT, INC.

V CROTHERS AUTHOR: PAGCALIWAGAN


182 Md. 573, 575 (Md. 1946) NOTES:
TOPIC: Preemptive Right to Shares This is a derivative suit.
PONENTE: Marbury, C.J. The purpose of the suit is to set aside the issuance of 40
shares of stock to Elizabeth Williams, 100 shares to Corrine
Williams, 100 shares to Lois Williams Young and 125
shares of stock to William Ross.

This Court affirmed the decision granting the relief prayed,


and directing the stockholders to repay to the corporation
the dividends received by them on the stock declared to be
illegally issued, and ordered cancelled.
FACTS:
 Ross Transport, Inc. (ROSS) was organized on January 19, 1942 to operate a fleet of buses to transport employees of
Triumph Explosives, Inc., to and from its plant at Elkton, Maryland.
 Incorporators were Wallace Williams, William B. Ross and Gervase R. Sinclair who later died.
 3 Incorporators and F. DuPont Thomson and James Hughes were the directors.
 Williams was named as president and Ross as General Manager.
 Authorized stock was 5,000 shares of no par value
 At the organization meeting a resolution was passed authorizing the sale of this stock at $20 a share, and providing that
stock to the value of $30,000 be offered for sale. This limited the stock to be issued at 1,500 shares.
 The stock records showed the original subscriptions to stock, as follows:
 March 25 – To Wallace Williams – 50 shares
 March 25 – To Wallace Williams, Jr. – 100 shares
 March 25 – To Elizabeth Williams – 200 shares
 March 25 – To Edmund Crothers – 100 shares
 March 25 – James Hughes – 150 shares
 March 25 – William Ross – 25 shares
 April 2 – F. DuPont Thomson – 150 shares
 April 2 – Bessie Whitelaw – 10 shares
 April 20 – Gervase Sinclair – 50 shares
 April 27 – Gervase Sinclair – 50 shares
 April 27 – Jean Sinclair – 150 shares
 Total = 1,035 shares
 After the death of Mr. Sinclair, Charles Crothers purchased the Sinclair stock, 200 shares.
 The stock complained of was issued to the wife and daughters of Wallace Williams and to William Ross, totaling 365
shares in all, and increasing the outstanding stock to 1,400 shares.
 Williams and Ross had the controlling interest in the company. Mr. Williams testified that all of the stock in the
company was sold by him personally under the directors’ resolution. He said that all the stock in dispute was definitely
promised in the beginning, except 40 shares to Mrs. Williams. He never called any other directors meeting to authorize
any of the sales made after the original subscriptions and none of the other stockholders were given an opportunity to
buy. He told Mr. Ross and Mr. Hughes how he was going to divide it.
 The sale of this additional stock to a director and to the family of the president and director without any further
authority than the original resolution, and without opportunity to buy given to other stockholders, is sought to be
justified on the ground that it was originally planned, and that the money was needed to purchase additional buses at a
cost of about $16,000
ISSUE(S): WON the sale and issuance of stocks made after the original subscriptions is illegal and should be cancelled.

HELD: YES.

RATIO:
The doctrine known as the pre-emptive right of shareholders is a judicial interpretation of general principles of corporation
law.
 Existing stockholders are the owners of the business, and are entitled to have that ownership continued in the same
proportion. Therefore, when additional stock is issued, those already having shares, are held to have the first right
to buy the new stock in proportion to their holdings.
The doctrine of pre-emptive right is not affected by the identity of the purchasers of the issued stock. What is concerned
with is who did not get it. But when officers and directors sell to themselves, and thereby gain an advantage, both in value
and in voting power, another situation arises, which it does not require the assertion of a pre-emptive right to deal with. It
has long been the law that trustees cannot purchase at their own sale, and trustees, in this sense, include, directors of
corporations.

The affairs of corporations are generally intrusted to the exclusive management and control of the BOD; and there is an
inherent obligation, implied in the acceptance of such trust, not only that they will use their best efforts to promote the
interest of the shareholders, but that they will in no manner use their positions to advance their own individual interest as
distinguished from that of the corporation, or acquire interests that may conflict with the fair and proper discharge of their
duty. The transaction may not be ispo facto void, but it is not necessary to establish that there has been actual fraud or
imposition practiced by the party holding the confidential or fiduciary relation; - the onus proof being upon him to
establish the perfect fairness, adequacy, and equity of the transaction; and that too by proof entirely independent of the
instrument under which he may claim. Such a transaction is not absolutely voided at the option of the interested parties, but
shifts the burden of proof upon the directors to establish its fairness.

It is not necessary for us to determine in this case whether the sale of stock to the Williams family and Ross is voidable
merely upon the application of some of the other stockholders, or whether proof of such sale merely makes it necessary for
these appellants to show the complete equity of the transaction. If we take the latter view, which is that most favorable to
these appellants, we must hold that the burden placed upon the two directors has not been met. They have not shown
that the company needed the money so badly and was in such a financial condition that the sale of the additional stock to
themselves was the only way the money could be obtained. On the contrary, the corporation appears to have been in a very
good financial condition. It is probable that any necessary financing of any buses could easily have been arranged through
some financial institution, and Williams and Ross benefited greatly by their action in selling the stock to themselves. Nor
is there any corroboration of Williams' statement that it was all arranged in the beginning, who was to get this additional
stock. None of the other incorporators or directors were called to testify about this, and Ross himself, as we have noted, did
not testify at all. We conclude, therefore, that the sale must be set aside as a constructive fraud upon the other stockholders.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):

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