many cases where this was undesirable, and to manage the Baltimore and Ohio, Erie, Reading, Lehigh Valley, Southern, Northern Pacific, and other railroad companies the system of voting trusts has been resorted to. It, therefore, becomes of some moment to inquire into the nature and validity of these contracts made by the shareholders of a corporation which are known as voting trusts. A voting trust is an agreement of the shareholders of a corporation by which they deposit, and agree to leave deposited, their certificates of stock for a term of years, with one or more trustees, receiving in exchange therefor negotiable receipts known as trust certificates. The trustees, being thus vested with the legal title, have power to vote the stock at corporate meetings, the shareholders meanwhile retaining the equitable title and beneficial interest, and being entitled to dividends as declared by the directors and to the reversion of the legal title to the stock at the conclusion of the trust agreement. By placing in the hands of trustees so constituted the power to elect directors, plans for the management of the company can be carried out undisturbed by a possible change of views among the shareholders and free from the attack or opposition of factious minorities. In considering the nature and validity of such contracts the following inquiries naturally arise: I. How and why do the shareholders come thus to delegate their power and right to vote? 2. Is it consonant with sound policy for the State to permit such a delegation of the shareholders' power? 3. What validity do such trusts have under our laws and the decisions of our courts? A modern railroad or industrial corporation is a very complex affair. It would be impracticable to carry on large enterprises in any other manner than as corporations. For one thing, capital is attracted which would not otherwise be thus invested. The limitation of each subscriber's liability to his original subscription enables persons of limited means practically to become partners in enterprises of great magnitude and profit, without taking time or effort from their own affairs or incurring liability beyond their original investment. At the same time the large amounts of capital requisite to big enterprises are thus raised, capital which could not probably be attracted in any other matter. When a meeting of the company takes place, once a year, probably only a handful of the owners of the stock are present, the great majority not attending the meeting at all, or delegating their votes by means of proxies, which proxies are usually given to the controlling interests or principal shareholders at the request of the latter. In fact, the shareholders of almost any large corporation are scattered all over the United States and Europe, and are practically unble to attend in person the meetings of the company. So long as the affairs of the company are flourishing and dividends are regularly paid, there is almost a monotony in the perfunctory annual meetings of the shareholders, which seem to be held principally for the unopposed re-election of the directors in office Nothing is heard of a voting trust, as the control is in the hands of those principally interested. No opposition manifests itself, and all is clear sailing. But presently comes a change. Hard times, mismanagement, or dividend counsels disrupt the harmoniously profitable workings of the concern and dividends cease. Shareholders come forward to question the why's and wherefore's, a militant minority arises and goes about arming itself with proxies, and the market value of the company's securities begins to decline, owing to sales of its stocks and bonds by dissatisfied or frightened holders. Then, perhaps, the compary fails to pay the interest on its mortgage debt and the trustees of the mortgage begin foreclosure proceedings. It is at about this time that the voting trust scheme is mooted. Powerful financial interests, within or without the corporation, volunteer, or are prevailed upon by those in interest, to take charge of the business of the corporation. They will undertake the rehabilitation of the company on behalf of the shareholders and creditors, provided they can have full control of the corporation for a time sufficient to accomplish it. Proxies to vote at and control the ensuing meetings are not sufficient for them. They will not consent to undertake the matter, unless paramount control can be assured to them for a period long enough to carry out their plans. It is enough to have to cope with the business difficulties in accomplishing their object; they will not place themselves in a position to have their plans opposed by a dissatisfied minority or interfere with by a sudden change of sentiment on the part of vaccilating, and, perhaps, ill-informed shareholders. Then, too, it may be necessary to keep these plans secret, and not to disclose them at stockholders' meetings, thus making them public. Again, there are the interests of creditors, the mortgage bondholders, to protect. The troubles of the corporation have probably come to a head on the failure to meet the interest due on one of its mortgages. A foreclosure suit has been begun and an agreement for reorganizing the property pending. It is the usual thing for the bond and municipal elections were not allowed to delegate their votes. But when the essential differences between public and private corporations were recognized proxy voting was everywhere legalized. It is now well settled that a shareholder in a corporation can freely confer his right to vote on any agent or attorney he may select, and all the authorities agree that so long as the proxy is revocable it is valid and unobjectionable. shareholders of such embarrassed corporations to holders in a corporation could not vote by proxy reorganize the property by appointing a committee at all (Morawetz on Corporations, sec. 486; Taylor and depositing their securities with such committee v. Griswold, 14 N. J. L. 222), and this was held to under an agreement or plan of reorganization. be the rule on the same principle that voters at This plan substantially provides that the committee shall buy in the property at a foreclosure sale, and turn it over to a new corporation in return for the stocks and bonds of such new corporation, which stocks and bonds are distributed by the committee to those who have deposited with it their securities under the reorganization agreement or plan. As a part of this agreement or plan the bondholders frequently stipulate for a voting trust, thus securing their interests in the new company by But it is on the giving of a proxy, irrevocable controlling the voting power of the stock through for a term of years, as in a voting trust, that there trustees indicated by them for that purpose. The is a conflict. Now, at least in so far as the sharestock of the new company is then issued to such holder himself is concerned, it would seem but reavoting trustees and certificates of beneficial inter- sonable to assert that if the delegation of his power est, representing the equitable title, are given to to vote is for proper purposes and has all the the shareholders. elements of a valid contract, he should be allowed to make such transfer, even though it be irrevocable, and once having made it, it should be valid as against himself (Chapman v. Bates, 60 N. J. Eq. 17), and if valid as against himself, why not as against every other? But it is urged that he cannot thus irrevocably delegate his power to vote because the vote of each individual shareholder affects the interest of every other shareholder, and that the relations of the shareholder to the corporation and of the corporation to the State forbid it (Shepaug Voting Trust Cases, 60 Conn. 553). Let us, then, look at these relations under the two heads: There are, then, generally speaking, two prominent examples of a voting trust, one, as part of a reorganization scheme or agreement to which stockholders and creditors are parties, the other being a simple agreement between the shareholders themselves. It is also competent to provide for such a voting trust in the certificate of organization or in the by-laws (Dill on New Jersey Corporations, p. 51). Looking now at the validity of voting trusts as contracts, it would seem in the case of a reorganization, where the equities of mortgage creditors are present, that there is, at any rate, ample consideration to support the arrangement, as was, in fact, decided in the case of the Reading Company's voting trust, which was created by just such a reorganization agreement. A shareholder of the Reading Company, although he held a voting-trust certificate, claimed to have bought it without notice of the agreement and attempted to enjoin the trustees from voting the stock represented by his certificate on the ground, among others, that an agreement placing the control of a corporation in the hands of those who were not the real owners of the stock was void, as being contrary to public policy. The injunction was denied, principally on the ground that the mortgage creditors' equities supported the agreement by which the voting trust was created and that the plaintiff took subject to his vendor's contract, although the judge remarked that "it was not permissible on general principles to separate the right to vote from the ownership of the stock" (Ervin v. Philadelphia and Reading Co., 7 Ry. & Corp. L. J. 87). So great a change has come over the laws regulating corporations during the last decade that it it difficult to say exactly what is, in many respects, the status of our public policy in regard to them. Being a creature of the statute law, a corporation and its shareholders can only act according to and within the rights given to them by the statutes and their charters. Formerly and at common law share 1. Shareholders' relations to each other. 2. Shareholders' relations to the State (through the corporation). In several judicial opinions (Shepaug Voting Trust, supra; Taylor v. Griswold, supra: Come v. Russell, 48 N. J. L. 208) it is maintained that by the mere association of individuals in a corporation a trust relation arises between such individuals, and that each one has the right to have each other one exercise his personal judgment upon every measure that comes before the shareholders at their meetings. But, if this principle were once acceded to and followed out, it might, in many cases, result almost in an absurdity. Where stock, for instance, is pledged for a loan, it is generally transferred to the pledgee on the books of the company, the right to vote thus following the legal title (Commonwealth ex rel. Eberhardt v. Dalzell, 152 Pa. St. 217). In the event of the loan being for two or more years, this would, under the doctrine contended for in these cases, be a breach of duty to the rest of the shareholders, as the shareholder pledging his stock would thus divest himself irrevocably and for a term of years of his power to vote, though still the real owner of the stock, and the power to vote it would be vested in one who was not the real owner. Again, it is the practice of corporations to close their stock transfer books ten days or more before of duty or of trust as against other shareholders for one shareholder to put it out of his power to vote on his stock, savors of the fanciful. It may, indeed, be said that where action is taken at a corporate meeting without due notice and hearing, dissatisfied stockholders have a right to complain on the ground that had a fair opportunity been given they might have persuaded their fellowstockholders of the inadvisability of the obnoxious measure. the stockholders' meeting, all stockholders of beyond this point, and to claim that it is a breach record on such closing day being entitled to vote at the meeting. It may well happen that such holders sell their stock between the time of the closing of the books and the meeting, passing title by indorsement and delivery of their certificates. The right to vote, nevertheless, remaining in the stockholder of record (People v. Robinson, 64 Cal. 373), at any rate, until it is challenged (New York Laws of 1901, chap. 355, sec. 20). As it is unquestionably the rule, however, that the shareholder of record at the closing of the books is entitled to a dividend in spite of subsequent change of ownership in the stock (Rice v. Morning Star, 83 Mo. App. 470), the logic of the situation would, under like conditions, entitle him to his vote. Were it true that a duty is owing by each shareholder to each other shareholder not to put it out of his power to vote, it would follow that stock could never be pledged for more than a year, neither could trusts in such securities be created for a longer period, as the trustee and not the beneficial owner would control the voting power. Even stockholders of record, if challenged, might not be allowed to vote, unless they produced their certificates at the meeting, for fear that they might have parted with their stock and that the other shareholders would be thus deprived of the benefit of the true owner's voice and vote, he having, perhaps, not been sufficiently apprised of the meeting to present his newly-purchased certificates for transfer. So that shareholders would either have to attend meetings with their certificates or send them on with their proxies when at a distance, on peril of being disfranchised. To carry out the doctrine of Taylor v. Griswold (supra) would put an end to proxy voting, and, indeed, when this case was decided proxy voting in New Jersey had not been legalized. But when the right to vote has been given up for a legal consideration it surely comes with bad grace from the stockholder who repents him of his bargain to demand it back on the ground that by placing the voting power of his stock in the hands of another person he has failed in his duty to his fellow-stockholders. If there is a grievance, it would seem to be in the other stockholders; but even in the cases in which the stockholder was allowed to revoke his own proxy (Griffith v. Jewett, 15 Wk. L. B. 419) it was held that a shareholder had no standing to object to the trustees voting on other shareholders' stock (Zimmermann v. Jewett, 19 Abb. N. C. 459; Beach on Private Corporations, secs. 304, 305). We now turn to the shareholders' relations to the State through the corporation. 2. What are the shareholders' relations, and what duties or obligations are owing by them to the State? To say that the shareholders are only related to the State through the corporation is to lose sight of the principles laid down in People v. North River Sugar Refining Co. (121 N. Y. 582), and in State v. Standard Oil Co. (49 Ohio St. 137), where the idea of the personality of the corporation was dismissed as a figure of speech, and the acts of the shareholders were held to be, in all intents and purposes, acts for which the corporation was liable, and for which, in both these cases, a forfeiture of charter was decreed. If a delegated voting power is used unfairly to do some illegal, oppressive or ultra vires act, the same remedies can be pursued against the voting trustees by the minority as against the majority Corporations were formerly created by special shareholders themselves (Fauld v. Yates, 57 Ill. grants of charters to certain persons, first, by the 416). Why is it any more probable that such king of England, then by parliament, and later by trustees should seek to do wrong than would those congress and by our State legislatures. When such whom they represent? It is, as a matter of fact, charters were conferred on special individuals, it usually the case that the voting trustees are far might well be said, as it was said, that there was a more capable of managing the corporation and vot-"delectus personarum" on the part of the State, and ing its stock for its best interests than are the that it was an obligation owing to the State that equitable owners of the stock, and such trustees the charter members should not delegate any of the are generally more largely interested than any one powers thus conferred upon them. Such a doctrine, else in the prosperity of the corporation, being, however, becomes hardly as plausible when corprobably, stock or bondholders themselves. porations are, as at the present time, organized under general laws permitting incorporators practi cally to grant themselves such charters as they please. To speak now of a "delectus personarum," as in Taylor v. Griswold (supra), savors of the archaic, and is applicable only to a state of affairs that has long since passed away. There is no longer any special personal confidence reposed by the State in the grantees of corporate franchises. Such views are, therefore, contrary to sound reasoning, and, it is submitted, to the weight of authority. The only tangible trust relationship existing between stockholders is one that imposes a duty on the majority not to oppress or defraud the minority, or to use their power for their own purposes and in derogation of the rights of the minority. To push the conception of a trust relationship The most unworthy persons may organize a corporation under general laws, and transfer the corporate franchise to other still more unworthy without the State having any voice in the matter. "Rights in the corporation can be adjusted and terms fixed by contract" (Chater v. Sugar Refining Co., 19 Cal. 245; N. E. Trust Co. v. Abbott, 162 Mass. 148). No great weight can, therefore, be attached to the suggestion that it is a breach of obligation to the State, or an ultra vires act, for a shareholder to delegate to another the power to vote for two years at two meetings when it would not be illegal to do so for one. If it is not forbidden by the charter or by a statute, it can scarcely be ultra vires or illegal, and so long as the State is willing to allow share holders to vote by proxy, what valid reason can be assigned for the limitation of that proxy to one year? And, indeed, no such limitation has, as general thing, been imposed by the State. The safeguards, so far as the State is concerned, are as ample against the abuse of their power by the trustees as they would be in the case of the stockholders themselves. In the North River Sugar Refiners' case the objection to trustees voting the stock was because they were an independent body outside of the corporation, and the effect was to create a partnership between independent companies, with a view to monopolizing the sugar business; this in itself would have been illegal, even though the shareholders had voted for it. It was not the mere delegation of their power to vote which lost them their charter, but it was the delegation of that power for improper purposes. In reviewing the decisions it becomes apparent that in substantially all of those cases where voting trusts were declared illegal, there was (1) either a lack of consideration for the voting-trust agreement, or (2) the purposes contemplated were illegal or dishonest. Griffith Jewett (15 Wk. L. B. 419), Zimmermann v. Jewett (19 Abb. N. C. 459), and Hafer v. N. Y., L. E. & W. R. R. Co. (14 Wk. L. B. 70) all arose out of the same transaction, which was an attempt to place the control of an Ohio corporation in a New York corporation (at that time an illegal act) in the following manner: of the stock so transferred. In the latter case the agreement could only be revoked as it was made, by the consent of all the parties beneficially interested as the entire stock of one shareholder may be purchased by another, there seems to be no reason why one may not acquire less than the entire interest in the stock of another." (Griffith v. Jewett, supra). Woodruff v. Dubuque R. R. Co. (19 Abb. N. C. 437) was litigated in Ohio at a time when the laws of that State did not allow proxy voting. The Shepaug Voting Trust Cases (supra), decided in 1890, are honeycombed with fraud and illegality. There the voting trustees' certificates came into the hands of bona fide purchasers through their forced sale as a pledge. It was discovered that the directors elected by the trustees had made a number of fraudulent and ultra vires contracts with a construction company, in which they were interested, to unlawfully extend the road, and had, without authority, issued bonds to raise the necessary money, and had given to the president, Chapman, $25,000 of the proceeds merely as a bonus. The court ordered the return of the stock to the holders of the trustees' certificates. In Taylor v. Griswold (supra), proxy voting not having been legalized by the legislature, was held void, as at common law. In Cone v. Russell (supra) there was a corrupt agreement by which the trustee of an estate, who transferred the voting power of the stock, was to be made manager of the corporation at a large salary, but the court said in its decision: "This conclusion does not reach so far as necessarily to forbid all pooling or combining of stock, * * * to carry out a particular policy to promote the best interests of all the stockholders; the propriety of the object validates the means, but must affirmatively appear." In Gage v. Fisher (1 N. D. 813) there was also an agreement that the giver of the voting power was to have an office, and the court refused to enforce the contract. Fisher v. Bush (35 Hun, 641) was a case in which there was no consideration, and power to sell stock was tied up by the agreement. Kreissel v. Distilling Co. (47 Atl. Rep. 471) was decided against the particular trust before the The stock of the Cinn., Ham. & Dayton Railroad court on the ground that the provision to exclude Co. was placed in the hands of H. J. Jewett, presi- non-consenting stockholders was contrary to public dent of the Erie Railroad, to be voted as the Erie policy, and because the plan for the rehabilitation of Railroad should direct. Even in this case the court the corporation was not to be submitted to the might have held otherwise had the object been legal stockholders until after the trust became operative. and the consideration a good one, as the following The chancellor said, after quoting Cone v. Russell, excerpt from the decision will show. The court as above, whether the grant of power is good said: "We know of no reason why two or more or not must depend upon the purposes for which it stockholders may not combine their shares in is given." the hands of a trustee, either for the simple purpose of allowing the latter to cast the vote of the shares, if the object for which the vote is to be cast be not illegal, or upon such terms as will give to each of them a beneficial interest in the whole Chapman v. Bates (60 N. J. Eq. 17) maintains the same doctrine, and in this case upholds a voting trust agreement. In a number of cases it is held that the consideration for a voting trust agreement must be some thing more than the mutual concurrent acts of the lawful, and the person by whom the proxy was stockholders in depositing their stock (Vanderbilt created continued to be the holder of the stock, v. Bennett, 2 Rail. & Corp. L. J. 409), otherwise in which the agreement has been held invalid. the power to vote will be a revocable one. (Harvey * ** Neither is it illegal or against public policy v. Linville, 24 S. E. Rep. 489; Cook on Corpora- to separate the voting power of the stockholder tions, § 610). from its ownership. * * * Cases in which it has been said that the stockholder could not divest himeslf of the voting power of his stock were cases which involved either the sufficiency of the agreement or the validity of the purpose for which the power was to be exercised. Public policy should not be allowed to interfere with contracts made voluntarily unless they contravene some positive statute or some well established rule." But cases where there is a valid consideration, and the objects to be attained are legal and honest ones, usually support voting trusts. As early as 1867, in Brown v. Pacific Mail S. S. Co. (5 Blatch. 525), where a voting trust had been created, Judge Blatchford said: "I am unable to see anything in this contrary to public policy or in any wise open to objection." In this case the trustee held an irrevocable power to vote and the equitable owners had agreed not to sell their stock until they had offered it to other stockholders and to the trustees. Shelmerdine v. Welsh (20 Phila. 199) is to the effect that where shares of stock are pledged as collateral, the parties may appoint a third person to hold the certificate for them, and exercise the right to vote; so that the voting trustees appointed under the reorganization of the Philadelphia R. R. Co., in 1887, were held to be not the representatives of the shareholders alone, but of the lien creditors also, and the court said that they occupied a position analogous to that of a disinterested third person, chosen by a debtor and his creditor to hold the pledge for the benefit of both. In Mobile & Ohio R. R. Co. v. Nichols (98 Ala. 92) the court said: "We have examined case after case to find generally that the agreements declared void, where the power to vote was separate from the stockholders and invested in third persons, were under circumstances that showed that the purpose to be accomplished was unlawful, such as the court would not sanction, if the principal had voted and not a proxy. * * * If there were no precedents, upon principle we should hold that in determining the validity of an agreement which provides for the vesting of the voting power in a person other than the stockholder, regard should be had to the condition of the parties, the purpose to be accomplished, the consideration of the undertaking, interests which have been surrendered, rights acquired and the consequences to result. The law does not make contracts for persons, neither will it annul them except to preserve its own majesty and to serve the greater interest of the public." This was a case where clearly there was a proper consideration, as the stockholder delegated their voting power to creditors of the corporation, who took debentures for the money owing them. It was agreed that the voting trust should continue as a security to the creditors until these debentures were paid off. The court said that the shareholders were doing something to preserve their property. As a general result of the cases, then, it would seem that there must be some substantial equity or consideration to validly make proxies irrevocable, even for the time agreed upon. If it is an arrangement simply between stockholders and is supported by nothing but the promise of each to each, without equities of creditors or third parties to support it, it is nudum pactum, and any shareholder or his transferee may withdraw his stock from the arrangement. This is also a shareholder's right where the agreement and objects to be attained are in any way tainted with illegality, or where the carrying out of a scheme contrary to public policy or good morals is involved. There must be some valid consideration moving to the stockholders, such as the agreement of creditors to withhold their claims or give indulgence or extension to the corporation, or their acceptance of new securities or the like; or an agreement with the trustees that they shall carry out a certain plan, or arrangement, or reorganization for the benefit of all the shareholders. The plan or scheme must be legal, substantial, proper, and one to which any or all of the shareholders can be admitted. In such cases, the delegation of the power to vote becomes a matter of contract with a valuable consideration moving to the shareholders, and there being once a valid contract, how can it be said that one of the contracting parties, or any transferee, assign, It is also remarked in the recent case of Smith or representative of his, taking with notice (as he v. San Francisco R. R. Co. (47 Pac. Rep. 582, 590), must when he receives a trustee's certificate) may that "there is no instance where the purpose of a at his pleasure withdraw, where his fellow stockproxy given upon a sufficient consideration was holders, creditors of the corporation and other |