will affect prejudicially a substantial right of the shareholder as such.1

If the circumstances will justify a court in holding an ultra vires contract valid, for any purpose, the specific performance thereof will be decreed as in other cases where the party seeking it has no other adequate remedy. And where it would have interfered at the suit of a stockholder to prevent the unlawful or fraudulent act, before its consummation, it will, upon his application, afterwards interpose and, if it will not work injury to innocent third parties, cancel bonds, set aside conveyances, and, in short, give whatever relief its jurisdiction and powers warrant.3

§ 616. Directors may be enjoined.-It follows that if the directors issue shares of any description not authorized by the constating instruments, or declare falsely that shares are fully paid up, such shares may be repudiated by the company while in the hands of the party to whom issued in the first instance. But certificates of stock have, to a certain extent, a negotiable character; and a bona fide purchaser of such certificate would have a right to hold the corporation bound by the statements therein, as in the case of commercial paper, without being affected by its false and fraudulent character as between the original parties. This being the case, and the corporation being threatened with irreparable injury, would have the right to an injunction restraining its transfer, and also to have it delivered up for cancellation. A shareholder under these circumstances could sue for the protection of his equitable rights as in other cases if the corporation were unable to protect him.1

1 Infra, § 623.

2 Infra, § 766.

3 City of Chicago v. Cameron, 120 Ill. 447; 11 N. E. 899.

4 Supra, § 580.

His right to protect his interests, by suing either in a representative or individual character, would extend to all cases of unauthorized issues of stock subject to the conditions and qualifications which would affect him. in other cases of abuse of trust and dereliction of duty by corporate agents. And though the act may be an over-issue of stock amounting to an attempt to increase the capital stock, in violation of a statutory prohibition, if it is unanimously ratified or authorized by the shareholders, neither any of the then existing or subsequent owners of the stock can maintain any action on account of it.2

§ 617. Actions to set aside fraudulent transactions by agents. Conveyances by which directors seek to obtain a common law preference over the other creditors are acts which will be viewed with jealousy and set aside. upon slight grounds. But an action by a mere creditor will not lie against a director for misfeasance or fraud in

1 Schenck v. Andrews, 57 N. Y. 150, per REYNOLDS, C.; Burrall v. Bushwick R. R. Co., 75 N. Y. 16, per FOLGER, J.; Williams v. West. Un. Tel. Co., Where a cor93 N. Y. 162, 189; per EARL, J.; Sturges v. Stetson, 1 Biss. 246. poration adopted a resolution to issue $50,000 of stock and $60,000 of bonds to raise money for the purchase of property of one of its trustees worth $65,000 while the stock was above par in the market, an injunction was issued to restrain the carrying out of the resolution, although a majority of the stockholders had consented to the arrangement. Gamble v. Queens County Water Co., 52 Hun, 166; 5 N. Y. S. 124.

The purchase by the president and directors of a turnpike company of a new turnpike road, the stock of which has no market value, paying for it in the stock of their own company, which is very valuable, can only have the effect to lessen the dividends, and is ultra vires, even though sanctioned by legislative enactment, if the rights of stockholders are not protected; and, at the instance of an objecting stockholder, such purchase will be enjoined. Shaw v. Campbell Turnp. Co. (Ky.), 5 S. W. 245.

2 Union Pac. R. R. Co. v. Credit Mobilier, 135 Mass. 367; Scoville v. Thayer, 105 U. S. 143, 153; Parsons v. Hayes, 14 Abb. N. C. 419; S. C. 50 N. Y. Sup. Ct., 29; Langdon v. Fogg, 18 Fed. Rep. 5. To the same effect, see Re Ambrose Lake, etc., Mining Co., L. R. 14 Ch. D. 390; Re Gold Co. L. R. 11 Ch. D. 701. But see Re British, etc., Box Co., L. R. 17 Ch. L. 467.

3 Twin Lick Oil Co. v. Marbury, 91 U. S. 587; Hallam v. Indianola Hotel Co., 56 La. 178; 9 N. 111.

the management of the corporate fund before insolvency.1

The date when a tort or injury was committed and not that of the judgment for the cause of action arising thereon determines the status of the injured party as a creditor in such case.2

§ 618. Where the adverse character is representative.— There is a distinction between transactions in which directors engage with themselves in their individual capacities, with respect to corporate property, and such

1 Zinn v. Mendel, 8 W. Va. 580; Branch v. Roberts, 50 Barb. 435; French Bank Case, 53 Cal. 495. Where an action was brought against a corporation for injuries resulting from the negligence of the corporation, and pending the action the corporation, then insolvent, mortgaged its property to its directors for money advanced, and the plaintiff in the action levied his execution after judgment upon the mortgaged property, it was held that he was entitled to have the mortgage declared void as against himself. Olney v. Conn. Land. Co. (R. I.), 5 L. R. An. 361. 2 Miller v. Dayton, 47 Ia. 312; Evans v. Lewis, 30 Ohio St. 11; Ford v. Johnson, 7 Hun, 563. In Olney v. Conn. Land Co., supra, the court, per STINESS, J., said:-" The vital question is whether a director of an insolvent corporation is to be regarded as a trustee for its creditors. If he is so, the duty of a trustee to a cestui que trust is plain. For a trustee to collect his own debt to the detriment of his cestui que trustent is a clear breach of fidelity. . . . They do not have in themselves the title to property which they hold for the benefit of others; and certainly as to creditors they are under no express trust.

While the decisions in regard to this relation are not harmonious it has been generally agreed that directors are trustees for the stockholders. This being established, we think it follows naturally that when the corporation becomes insolvent and the stockholders have no longer a substantial interest in the property, the corporation directors should be regarded as trustees of the creditors to whom the property of the corporation must go."

In a case where the renewal of two notes was ordered in the same resolution, in only one of which a director voting for the resolution was interested, it was held that the validity of the other was affected by such interest, and that the vote of such director being necessary to constitute a majority of those voting for the resolution the note of the other party could not be recovered against the corporation. Smith v. L. A. Immigration Ac. Ass'n, 78 Cal. 289; 20 P. 677. A sale by several directors of a railroad corporation of its property to one who has been a director, but resigns in order to make the purchase, is voidable only, and not void per se. Town of Searcy v. Yarnell, 47 Ark. 269; 1S. W. 319. But it was otherwise where four persons who were common directors in two different railroad corporations became the assignees of a construction contract, made by one of the companies, by which they became entitled to receive its stocks and bonds and by which they made a large profit. Barr v. N. Y. L. E. & W. R. Co., 52 Hun, 555; 5 N. Y. S. 623.

as involve only a representative character which they have lawfully assumed. The latter class are neither void nor voidable unless actually fraudulent or some advantage is taken of the situation and relation.1

$619. An officer may sue.-A director or other officer may maintain an action for an accounting and an injunction in the name of the corporation without the authority of the board of trustees, or against its express direction to a similar effect as other stockholders.2

§ 620. Test of agents liability.—In the management of the corporation's affairs, directors are only bound to keep within the limits of the powers conferred upon them, and to exercise reasonable diligence, good faith and honesty.3 A mere error of judgment will not subject a director to personal liability therefor.1

1 Where the directors of a corporation sold its property to another corporation, of which they were also directors, for the purpose of paying its debts, and the corporation whose property was sold realized more than it was worth, it was held that after the selling corporation had received the full benefit of the transaction, its stockholders could not complain. Manfrs.' Sav. B'k v. O'Reilly, 97 Mo. 38; 10 S. W. 865; Kitchen v. St. L. K. C., etc., R. Co., 69 Mo. 224.

2 So held in a case where a majority of the directors were shown to have wrongfully converted corporate funds and threatened to convert others, and where the neglect of the board to sue and its resolution to discontinue the suit already brought were simply acts in furtherance of an unlawful design. Recamier Mfg. Co. v. Seymour, 24 N. Y. St. R. 54; 5 N. Y. Supp. 648.

3 Hodges v. N. E. Screw Co., 1 R. I. 312; Gilbert's Case, Law R. Ch. 559. The president and directors of a turnpike company authorized by statute to remove any of its gates as they may deem right, and for the interest of the road, cannot, as long as they act in good faith, be restrained from the exercise of the power, and the sale of the abandoned toll-houses, at the suit of the stockholders. Bardstown & G. R. Turnpk. Co. v. Rodman (Ky.), 13 S. W. 917. In a suit by a stockholder against the officers and directors of a corporation, for an accounting, the bill is demurrable if it merely alleges that fees were paid to attorneys who were employed, not in good faith, but merely for the purpose of resisting complainant's efforts to redress the wrongs committed against her by defendants, but does not set forth facts to show the mala fides. Perry v. Tuscaloosa Cotton Seed Oil Mill Co., 9 So. 217. (April 30, 1891.) Before the directors of a bank can be held liable, in case of almost total inattention to its management, for losses from loans made by the cashier without their knowledge or consent, it must be shown that the cashier did not exercise reasonable skill, diligence, and prudence in making the loans. Wallace v. Lincoln Sav. Bank (Tenn.), 15 S. W. 448.

* Sperling's App., 71 Pa. St. 11; Smith v. Prattville Mfg. Co., 29 Ala. 503,

But he is responsible to stockholders for all losses resulting from gross neglect, fraud, embezzlement, wilful misconduct, and breaches of trust. They are not liable for mistakes of judgment when they have acted honestly and with due diligence within the scope of the powers and discretion confided to them.2

But a director is liable to the injured party for damages resulting from his assent to the payment of a dividend amounting to more than the profits, independent of statutes.3

§ 621. Court will not interfere with internal management. The jurisdiction of the court in no case will extend to interference with the legitimate internal management of the corporation. The court will not

supra, § 429. In an action by a stockholder to restrain the corporation from consolidating with another corporation, brought on the ground that the proposed consolidation is unlawful, and that defendant's property will be confused with other property, causing loss and confusion, an injunction pendente lite will be granted. Young v. Rondout & K. Gas-Light Co., 15 N. Y. S. 443.

1 Shattuck v. Oakland, S. & R. Co., 58 Cal. 550. See Marshall v. Fleece, etc., Co., 16 Nev. 157, supra.

2 Scott v. De Peyster, 1 Edw. Ch. 513; v. Sparkman, 73 Tex. 619; 11 S. W. 846.

Sperling's App., 71 Pa. St. 11; Cates See also note to sec. 152, Wood's Field on Corporations, and Green's Brice's Ultra Vires, 408 et seq., supra.

8 Hill v. Frazer, 22 Pa. St. 320.

ant.

4 The stockholders of a corporation financially embarrassed, authorized the trustees to sell property to pay debts. At a sale duly advertised, of which the stockholders had notice, and at which many were present, the property was struck off to the secretary, who was also one of the trustees, and bought in the interest of a combination of stockholders formed in good faith, for their own protection, after it seemed probable that the property would not sell except at a great sacrifice. It appeared to have been sold for all that it was worth, and the purchase by the secretary was approved by all the stockholders except complainIt was held that the action of the majority was not oppressive nor in bad faith, and that the sale would not be set aside. Hayden v. Official Hotel, R. B. & D. Co., 42 F. 875. See also Barr v. N. Y. L. E. & W. R. Co. (N. Y.), 26 N. E. 145. An injunction will not be granted to restrain a produce exchange from investigating charges brought by one of its members against another, under a by-law conferring the power to investigate inter alia, “proceedings inconsistent with just and equitable principles of trade," plaintiff having refused to pay a demand for which an action is pending against him in the courts. DANFORTH, RAPALLO, and FINCH, JJ., dissenting. Hurst v. New York Produce Exchange, 100 N. Y. 605; 3 N. E. 42.