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Krell v. Krell Piano Co.

[14 Ohio

preferred stock of the defendant company, and having control of the board of directors of the defendant company, made the sale to the Werner Industries Company; and that Maxwell was the owner of the Werner Company, with the exception of four shares, one to each of the four directors, he being the fifth director thereof. In other words, that Maxwell was both the vendor and vendee of the assets and thereby took undue advantage of the plaintiffs and the defendant company by virtue of his control of both companies.

The first question for determination is: Were the provisions of Sections 8710 to 8712, inclusive, General Code, complied with as affecting the legality of the sale?

Assuming, without deciding, that the sale constituted the sale of the entire property and assets within the meaning of the statute, we are of opinion that the requirements of the statute were met upon the three-fourths vote of the preferred stock, voting at the meeting, approving the sale. The articles of incorporation of the defendant, The Krell Piano Company, provided: "Said preferred stock shall be entitled to yearly dividends of 7 per cent, which dividends shall be cumulative and payable semi-annually, and said preferred stock shall be preferred both as to dividends and as to assets in the event of dissolution, but shall not be entitled to any voting power at the annual or other meetings of the stockholders of said corporation, unless default shall have been made by it in the payment of six or more of said semi-annual preferred dividends, in which event the holders of said preferred stock shall have sole voting rights, to the exclusion

App.]

Krell v. Krell Piano Co.

of the holders of its common stock." No dividends were ever declared or paid by the company on its preferred stock, and it had defaulted for more than six semi-annual dividends. Whereupon, the preferred stock became entitled to the sole voting rights, to the exclusion of the holders of the common stock.

Under the provisions of Section 8712, General Code, the adoption or rejection of the sale of the assets is upon vote by ballot. The common stockholders having, by virtue of the articles of incorporation, lost all voting rights by the default therein provided, how may it be said that they still possessed the right to vote on the proposition by which the owners of the preferred stock were endeavoring to protect their interests, the very thing for which the articles of incorporation provided? The common stockholders took their shares knowing of and subject to these restrictions, and fully cognizant of the fact that upon the happening of the conditions they would be barred from any and all voting power and that the preferred stock under the conditions named should have sole voting rights. Any other view would, in effect, take away from the preferred stock the protection provided in the articles of incorporation. We know of no law and none has been cited by counsel which forbids a corporation and its stockholders from making any restrictions they please in regard to the voting power, which is in the nature of a contract between the corporation and its stockholders. 2 Cook on Corporations (7 ed.), Section 622b; 1 Machen on Corporations, Section 570; 1 Thompson on Corporations (2 ed.), Section 859; 3 Clark & Marshall on

V

[14 Ohio

Krell v. Krell Piano Co.

Private Corporations, 1996; State, ex rel. Frank, v. Swanger, 190 Mo., 561, and Miller, Exr., v. Ratterman, 47 Ohio St., 141.

Section 8712, General Code, must, therefore, be construed with reference to the articles of incorporation of the defendant. The conditions giving the sole voting rights to the preferred stock, the common stockholders were not entitled to vote at the meeting held for the adoption or rejection of the resolution of sale, and more than three-fourths of the preferred stock voting to adopt the resolution of sale, the sale was legal as against this objection.

The second question is: Are the plaintiffs entititled to relief by reason of any proof of bad faith on the part of Maxwell and the officers and directors of the Krell company?

We think under the circumstances of this case, on the conceded facts, that it was incumbent upon Maxwell and the directors and officers of the defendant company to show that they have dealt fairly with the Krell Piano Company and its stockholders. (Truman v. Coghlin Machinery & Supply Co., 11 Ohio App., 220, and cases there cited.) In determining this matter, we have not the same liberty in considering the facts as if the case were heard de novo on appeal. The case is here on error from the judgment of the superior court. The case was tried to the court, and that judgment, like the verdict of the jury, will not be set aside unless manifestly against the weight of the evidence. Breese v. State, 12 Ohio St., 146; Landis v. Kelly, 27 Ohio St., 567; Scott v. Perlee, 39 Ohio St., 63, 65; Henkle v. Salem Mfg. Co., 39 Ohio St., 547, 552; Reed v. Board of Education, 39 Ohio St., 635, 638; P., C.

App.]

Krell v. Krell Piano Co.

& St. L. Ry. Co. v. Howard, 40 Ohio St., 6, 8; Eleventh Street Church of Christ v. Pennington, 18 C. C., 408, and Cincinnati Traction Co. v. Harrison, 24 C. C., N. S., 1.

We approach the consideration of the evidence under the rule that the judgment of the trial court will not be disturbed unless the record shows clearly and satisfactorily that the judgment is manifestly against the weight of the evidence. In this connection the credibility of the witnesses cannot be considered, and where the evidence is merely conflicting the determination of the trial court as to such evidence will not be disturbed. While we cannot undertake to discuss in detail the great volume of evidence submitted, the outstanding facts and important features of the evidence are as follows:

It appears that in November, 1911, The Krell Piano Company, located in Cincinnati, of which Albert Krell, the chief party plaintiff herein, was director and president, was in financial difficulty, requiring a reorganization and infusion of new capital. The majority of the preferred stock in the Krell Piano Company was owned by the heirs of Andrew Hickenlooper, who were threatening the company with liquidation. November 13, 1915, Mr. Maxwell was procured to take over the Hickenlooper stock. This stock gave Mr. Maxwell the controlling interest in the preferred stock, for which he paid $25,000. In the new organization the only common stock issued was in the amount of $150,000 to Albert Krell and his associates in consideration of a transfer to the Krell Piano Company of certain shop rights in patents for piano players, and, thereupon, by virtue of this issue,

Krell v. Krell Piano Co.

[14 Ohio

Krell and his associates acquired the exclusive voting power and control of the Krell Piano Company. Notwithstanding the reorganization of the company it continued in financial difficulty. About a month after Maxwell became the owner of the Hickenlooper stock, he loaned $9,000 to the company, and about a month later an additional $1,000. The company continued to meet with financial embarrassment in the conduct of its business, and became more and more involved under the management of Krell as president and chairman of the board of directors, and E. B. Pfau as secretarytreasurer. Krell, as president, borrowed large sums of money for the company on his own initiative, as much as $75,000 at one time. While those loans were subsequently approved by the board of directors, it shows the complete domination of the company by Krell. It appears that Maxwell continued to back the company, both by furnishing money and endorsing notes until he became involved in approximately the sum of $100,000, and he thereupon began to take steps to protect his interests.

It is claimed by the plaintiffs that Maxwell was protected at least in part by piano leases, and was in no danger of losing, but the quality of the security, depending on the payments by purchasers of pianos and other instruments, was not such security as to justify a feeling of safety on the part of Maxwell. Further, it is shown that some $10,000 of the securities were collected by Krell and his associates in the management and directed to the use of the campany, instead of discharging the liability to Maxwell.

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