HOLMES vs. CAMP

DECEMBER 7, 1917

Corporation, Representative Action

FACTS:

The Doe Run Lead Company acquired a large number of shares of the capital stock of the St. Joseph Lead Company, where such stock were held in trust for the use and benefit of the Doe Run Lead Company, which was the real owner thereof.

It was kept in secret knowledge by some of the stockholders that the St. Joseph Lead Company's stock was of much greater value than was commonly known and that the company was about to declare large future dividends.

A conspiracy was made to buy from the Doe Run Lead Company the stock of the St. Joseph Lead Company then held by and for it, thereby committed a fraud upon the Doe Run Lead Company.

The purpose of the action is to compel those who thus defrauded the Doe Run Lead Company as it is alleged, to return to that company the stock which they acquired from it, or if they have parted with the stock to account for its value.

Plaintiffs were, stockholders of the Doe Run Lead Company, but they exchanged this stock for shares of stock of the St. Joseph Lead Company, which they now own.

Robert Holmes individually is a stockholder in the Doe Run Lead Company as well as in the St. Joseph Lead Company, while all the other plaintiffs are stockholders only in the St. Joseph Lead Company. They all sue, however, in the right and on behalf of the Doe Run Lead Company to compel restitution to that company,

ISSUE:

W/N stockholders of a holding company may maintain a representative action for the benefit and in behalf of the subsidiary company, the directors of both companies having refused, after due request, to institute an action in the name of either company?

RULING:

We are unable to see any controlling reason why it should not be permitted.

Representative actions by stockholders are unique in that they are not prosecuted by the stockholder plaintiff for his own direct benefit, or in his own direct right, or because any right of his has been directly violated or because he is entitled individually to the relief sought. Such actions are, as they are commonly designated, purely representative, the plaintiff being permitted to maintain the action, notwithstanding his lack of direct interest, solely to set the machinery of justice in motion, and to prevent what would otherwise be a complete failure of justice.

This form of action is an invention of equity, and stockholders are allowed to resort to it, notwithstanding a lack of direct interest in the relief sought because, as it has been said, "the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue."

The part which a stockholder plays in such an action is merely that of an instigator. The cause of action is that of the corporation, and the recovery must run in its favor. Under these circumstances it is not easy to see why a stockholder in a holding company may not maintain such an action for the benefit of the subsidiary company, and thus indirectly for the advantage of the holding company. His stock interest in the latter company is sufficient to relieve him from the imputation of being a mere officious and impertinent intermeddler.

Clearly no such embarrassment or prejudice can exist in a case like the present when the plaintiffs sue, not in their own right, nor for their own direct benefit, but in the right and for the benefit of a corporation, provided they all sue in the right and for the benefit of the same corporation, and they all have an interest, however indirect, in seeing to it that the corporation receives reparation for the wrongs alleged in the complaint.

What the defendants are called upon to do in this action is to answer to the Doe Run Lead Company, not to these plaintiffs nor to any other stockholder of either company, and it can work no possible prejudice to the defendants who sets the machinery of justice in motion, so long as that person has an ultimate interest in the matter.