is a contract necessarily void because all the directors of one of the corporations are members of the board of directors of the other corporation.' The rule, however, has many exceptions in practice, and it would seem that its application extended much beyond ordinary dealings between the corporations having directors in common. It has also been held that directors of one telegraph company, who are also directors of another company which owns two-fifths of the stock of the former, cannot properly vote to lease the property of the former company to the latter. Such a lease is voidable."

--

248. Consummation of fraudulent contracts may be enjoined. A court of equity may restrain the consummation of contracts between directors and the company fraudulent upon their face; and the fact that a majority of the shareholders

1 Alexander v. Williams, 14 Mo. contracts shall be given it, in the App. 13. profits of which they, as stockholders of the new company, are to share, are so many unlawful devices to enrich themselves to the detriment of the stockholders and creditors of the original company, and will be condemned whenever properly brought before the courts for consideration. Wardell v. Railroad Co., 103 U. S. 651, 658.

2 Bill v. Western Union Tel. Co., 16 Fed. Rep. 14; San Diego v. San Diego &c. R. Co., 44 Cal. 106. Where the board of directors of an insolvent corporation conveyed all its property to secure a debt due from it to another corporation, at a meeting in which one or more of the directors, participating and voting, for the conveyance, were also directors of the other company, it was held to be prima facie fraudulent and void as to the grantor, its stockholders and creditors; and it was said that clear and convincing proof would be required to show that the conveyance was fair, reasonable and free from fraud. Sweeney v. Grape Sugar Co., (1888) 30 W. Va. 443. It seems a matter of course, that arrangements by directors of a railroad company, to secure an undue advantage at its expense, by the formation of a new company as auxiliary to the original one, with an understanding that they, or some of them, shall take tock in it, and then that valuables

3 Bill v. Western Union Tel. Co., 16 Fed. Rep. 14. When two corporations enter into a contract with each other, parties holding the position of directors in either corporation consenting thereto, but the shareholders not being advised with, the contract is voidable, even though at the election of the directors the stockholders were cognizant of the fact that some of them belonged to the board of the other corporation, and even though the contract were confirmed by a majority of directors without taking into account those who were members of either board. Metropolitan Elevated Ry. Co. v. Manhattan Elevated Ry. Co., 11 Daly, 373; s. c. 14 Abb. N. C. 103.

may have given their consent to the transaction will not deprive the creditors or minority stockholders of the right to restrain the fraud by injunction.' But where it does not appear that a corporation was insolvent at the time its board of directors executed judgment bonds to secure debts due certain of the directors, or that there was any collusion or actual fraud, the mere entry of judgment on the bonds after its supposed insolvency is not such a fraud in law as to warrant the continuance of an injunction restraining the sale of corporate property on execution issued on the judgment.2

1 Gamble v. Queens County Water Co., (1889) 52 Hun, 166. In this case a corporation organized under the general manufacturing act adopted a resolution to issue $50,000 of stock and $60,000 of bonds to raise money for the purchase from one of its trustees of property worth $65,000. The corporate stock was at that time above par. This was regarded as

sufficient evidence of fraud to authorize an injunction restraining the company from carrying out the resolution. And the court said that it was immaterial that a majority of the stockholders consented to the arrangement.

2 Appeal of Neal, (Pa. 1889) 18 Atlan. Rep. 564.

1

§ 249. Introductory. Since the directors of corporations generally serve without compensation, their liability for neglect of duty is similar to that of mandatories; being elected from the body of stockholders, they are not to be judged by the same strict standard as agents or trustees of private estates. It is said on the one hand that in matters of discretion they are not responsible for mistakes of judgment, nor in ministerial duties for anything less than gross negligence or fraud. Mere imprudence, unless it amounts to gross

1 Percy v. Millaudon, 8 Mart. N. S. 68; s. c. 6 Mart. N. S. 616; s. c. 17 Am. Dec. 196; Seymour D. Thompson in 6 So. L. Rev. 389.

2 Thomp. Liab. O. & A. Corp. 233. And where a union store association, instead of confiding the management of its affairs to its directors, imposes the same upon a managing agent, and the members knowing how the business is conducted, and

that the by-laws are not strictly observed and obeyed, acquiesce in what is being done, the directors are not to be held to as strict an accountability as directors of an ordinary moneyed corporation. Henry v. Jackson, 37 Vt. 431.

3 Citizens' Building Assoc. v. Coriell, 34 N. J. Eq. 383; Neall v. Hill, 16 Cal. 149; Spering's Appeal, 71 Pa. St. 11; s. c. 10 Am. Rep. 681; Char

negligence, in the exercise of a rightful power will not render the directors personally liable. On the other hand it is denied that a director is only responsible for gross misjudg ment until it approaches bad faith. And like a mandatory, to whom he has been likened, it is argued, he is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise ordinary skill and judgment, he can not set up that he did not possess them. When damage is caused by his want of judgment, he can not excuse himself by alleging his gross ignorance. One who voluntarily takes the position of director and invites confidence in that relation, undertakes, like a mandatory, with those whom he represents or for whom he acts, that he possesses at least ordinary knowledge and skill, and that he will bring them to bear in the discharge of his duties. Such is the rule applicable to public officers, to professional men and to mechanics, and such is the rule which must be applicable to every person who undertakes to act for another in a situation or employment requiring skill and knowledge; and it matters not that the service is to be rendered gratuitously. They must exercise such reasonable diligence or ordinary care as a prudent man takes in the management of his own concerns.3 They are personally liable if they suffer the corporate funds or property to be wasted or lost by gross negligence and inattention to the duties of their trust.1

itable Corporation v. Sutton, 2 Atk. 400; Overend & Gurney Co. v. Gibb, L. R. 5 H. L. 480; s. c. L. R. 4 Ch. 701.

1 Overend v. Gibb, L. R. 5 H. L. 480; Hedges v. Paquett, 3 Oregon, 77; Excelsior Petroleum Co. v. Lacey, 63 N. Y. 422; Henry v. Jackson, 37 Vt. 431; Vance v. Phoenix Ins. Co., 4 Lea (Tenn.), 385; Godbold v. Branch Bank of Mobile, 11 Ala. 191; s. c. 46 Am. Dec. 211.

2 Earl, J. in Hun v. Cary, (1880) 82 N. Y. 65; s. c. 37 Am. Rep. 546, citing Story on Bailments, § 182.

3 Smith v. Prattville Manuf. Co. 29 Ala. 503; Percy v. Millaudon, 8 Mart. N. S. 68; Bank of Mutual Re

demption v. Hill, 56 Me. 385; Scott v. De Peyster, 1 Edw. Ch. 547.

4 Horn Silver Min. Co. v. Ryan, (Minn. 1890) 44 N. W. Rep. 50. In this case it is further held that an action at law may be maintained against them jointly and severally for the amount of such losses. Also that a complaint states a cause of action which alleges that defendant wholly neglected his official duty with regard to detailed transactions of certain defaulting officers, that the means of knowledge of such transactions was within his reach, and that he wholly failed to prevent or expose them, but abstained fron attending the meetings of the direct

§ 250. Ability and honesty required.- Directors must have reasonable capacity and exercise their best judgment if they would escape liability for mismanagement.1 For supine and gross negligence on their part and malicious exercise of their discretion, which amount to a breach of trust, they are liable in damages. Good faith in the management of the affairs committed to their charge is a primary requisite from the fiduciary position occupied by directors whether they are regarded as strict trustees or not. They are not liable for errors in the exercise of a discretion confided to them, unless so great as to amount to gross negligence, or to evince want of ordinary capacity or to warrant the imputation of fraud. Whether a particular act of the directors is under the circumstances performed with ordinary prudence, skill and care, or whether it be rash and imprudent, is for the jury to determine. The fact that they acted in good faith is no defense. to an action against directors for damages resulting from ultra vires acts.6 One who has acted as trustee may be liable, although he was not legally elected, and was not a stock

ors.

And it is not necessary that the complaint should negative knowledge of, or acquiescence on the part of the stockholders in, the negligence or misconduct of the directors. Nor is there misjoinder of causes of action in the complaint which sets forth a series of acts or omissions on the part of directors, alleged to have constituted actionable negligence on their part.

1 Hun v. Cary, 82 N. Y. 74; Vance

v. Phoenix Ins. Co., Lea, 385.

Am. Rep. 546. Cf. Van Dyck v. McQuade, 86 N. Y. 38. See also Spering's Appeal, 71 Pa. St. 11; s. c. 10 Am. Rep. 684; Scott v. De Peyster, 1 Edw. Ch. 513; Litchfield v. White, 2 Sand. 545; Liquidators &c. v. Douglas, 11 Ses. Cas. 3rd series, 112. 6 Lester v. Howard Bank, 33 Md. 558; s. c. 3 Am. Rep. 211; Van Dyck v. McQuade, 45 N. Y. Super. Ct. 620; Ex parte Wilson, L. R. 8 Ch. 45; Hodgkinson v. National &c. Ins. Co., 26 Beav. 473; Williams v. Page, 24 Beav. 654; 2 Lindley on Partnership, 592, 794, except where there is doubt as to the limits of their authority; Hodges v. New England Screw Co., 1 R. I. 312; s. c. 3 R. I. 9; 53 Am. Dec. 624; Spering's Appeal, 71 Pa. St. 11; s. c. 10 Am. Rep. 684. As where the charter of a company is a complicated one made up by comparing sixteen acts of incorporation or supplements. Spering's Appeal, Hun v. Cary, 82 N. Y. 65; s. c. 37 71 Pa. St. 11; s. c. 10 Am. Rep. 684.

2 Charitable Corporation v. Sutton, 2 Atk. 400, and the cases cited above. 3 Bank of St. Marys v. St. John, 25 Ala. 611; Smith v. Prattville Manuf. Co., 29 Ind. 503; Ryan v. Leavenworth &c. R. Co., 21 Kan. 36; Shea v. Mabry, 1 Lea, 319; Vance v. Phoenix Ins. Co., 4 Lea, 385.

4 Godbold v. Branch Bank, 11 Ala. 191; Van Dyck v. McQuade, 86 N. Y. 38.