Appeal from the Circuit Court of Cook county; the Hon. CHARLES
S. DOUGHERTY, Judge, presiding. Affirmed.
PRESIDING JUSTICE NIEMEYER DELIVERED THE OPINION OF THE COURT.
Plaintiffs, the owners of 651 shares of more than 16,000,000 outstanding common shares of defendant Commonwealth Edison Company (herein called Edison), appeal from a judgment for defendants in plaintiffs' derivative action for the rescission of a contract between Edison and its subsidiary, the defendant Northern Illinois Gas Company (herein called Northern), designated their "Final Separation Contract," the restoration to Edison of assets valued in excess of $5,000,000, alleged to have been given away without consideration by Edison to Northern pursuant to the terms of the Final Separation Contract, and damages to Edison resulting from the negligence and breach of duty of the directors of Edison, defendants herein, in giving away such assets. The judgment was entered on defendants' motions to dismiss the complaint, as amended, in which defendants assigned with other grounds for dismissal the failure to state a cause of action that Edison could enforce.
Edison was and is a public utility, supplying electricity. Prior to February 9, 1954 it supplied gas. On the latter date it transferred its gas and heating properties to Northern, a recently created corporation, and received as part consideration therefor 5,892,484 shares of Northern common stock, each share representing $10 of the actual net assets of Northern. Concurrently with the transfer it purchased 100,000 shares of Northern 5 per cent convertible preferred stock for $10,000,000 in cash to provide working capital and construction funds for Northern. Each share of the preferred stock is of the par value of $100 and convertible after January 31, 1957 into 10 shares of Northern common stock.
April 27, 1954 Northern publicly offered and sold 400,000 shares of common stock at $15.75 per share to procure additional working capital. Until this sale Northern was a wholly owned subsidiary of Edison.
August 2, 1954, pursuant to its announced intention to distribute its Northern common stock to holders of its common stock, Edison declared a dividend in kind of 656,454 shares of Northern common stock on the basis of one share of Northern for each 25 shares of Edison. The holders of Edison common stock received 422,480 shares of Northern. The remaining 233,974 shares were sold and the proceeds distributed to Edison shareholders electing to receive cash instead of stock.
January 26, 1955 Edison and Northern entered into the Final Separation Contract, reciting that Edison desired a firm understanding with Northern that certain agreements and transactions would be entered into and carried out between them before recommending that its board of directors authorize the distribution to its common stockholders of a number of shares of Northern common stock constituting not less than 80 per cent of the total voting power represented by the then outstanding preferred and common stock of Northern as a tax-free dividend, and accepting offers to purchase the 100,000 shares of Northern preferred stock held by Edison at $165 per share. This recital is followed by an agreement between the parties with respect to a number of intercompany matters stated in separate paragraphs in the contract.
Plaintiffs object only to two transactions: (1) The waiver by Edison of any right it might have to $96,141.64, the amount of a refund paid by the Texas-Illinois Natural Gas Pipeline Company to Northern allocable to purchases by the gas department of Edison during January 1954, Northern indemnifying and agreeing to hold Edison harmless from any claims by gas customers with respect to or by reason of such allocable portion of the refund; (2) The surrender by Edison to Northern, promptly following confirmation and acceptance of the Final Separation Contract by Northern, of 253,915 shares of Northern common stock and the canceling of such stock by Northern. At the closing market price on the date of the contract the shares later surrendered had a total market value of $5,046,560.63.
The Final Separation Contract was entered into pursuant to resolutions of the board of directors of Edison and Northern. Ten of the seventeen members of the Edison board were members of the eleven-member-board of Northern. Upon confirmation and acceptance of the contract by Northern, Edison sold 100,000 shares of Northern preferred stock and received therefor $16,500,000 on February 1, 1955. It also surrendered 253,915 shares of Northern common stock and same were canceled. On March 1, 1955 it distributed as a dividend in kind 4,982,115 shares of Northern common stock to its common shareholders on the basis of three shares of Northern common stock for each ten shares of Edison common stock, thereby terminating its holding of Northern stock. On July 15, 1955 the five original plaintiffs, owners of 70 shares of Edison common stock, by letter requested that the directors and executive officers of Edison take appropriate action to procure the relief sought herein. No reply was received by plaintiffs.
Plaintiffs allege that the provisions of each paragraph of the Final Separation Contract, numbered 1 to 12 inclusive, are separate agreements entered into at various times prior to the date of the Final Separation Contract, and that in making each of these separate agreements the corporations did not take into account the benefits conferred or the detriment incurred by them in making any one or more of the other separate agreements but grouped all of the agreements for convenience in separate paragraphs in the Final Separation Contract; that Edison received no assets, rights or benefits in exchange for its waiver of any right to the refund and the surrender of the Northern common stock for cancellation, or alternatively, if the separate agreements in the Final Separation Contract are mutually dependent on each other, the net value of the assets, rights and benefits to Edison under all the agreements was less than $50,000; that in either case the waiver of any right to the refund and the surrender of the Northern common stock for cancellation were a giveaway of Edison's assets, valued in excess of $5,000,000, and are voidable by Edison as unfair, unconscionable, and an unjust enrichment of Northern; that the directors of Edison negligently sacrificed the interest of Edison and negligently permitted the waste and misappropriation of its assets by authorizing the acts complained of; that these transactions are fraudulent in law as to Edison.
Edison and its directors joined in a motion to dismiss the complaint. Northern filed a separate motion. While the motions were pending, four stockholders owning a total of 324 shares of Edison common stock, and then five stockholders owning a total of 257 shares of common, were made additional parties plaintiff, making fourteen stockholders, owning 651 shares of Edison common, parties plaintiff.
Plaintiffs by leave of court amended the complaint by adding allegations intended by them to excuse application to the stockholders of Edison to take appropriate action to obtain the relief sought herein.
The motions of defendants to dismiss the complaint were ordered to stand as motions to dismiss the complaint as amended. After hearing, the complaint as amended was dismissed with prejudice, and plaintiffs having elected to stand on the complaint as amended, hereinafter called amended complaint, judgment was entered that plaintiffs take nothing by the action and defendants go hence without day.
The right to maintain this suit rests upon the existence of a cause of action against the defendants Northern and the directors of Edison, in favor of Edison, and upon the neglect and refusal of the corporate body to act for itself. 13 Am. Jur., Corporations, sec. 461, page 506; Murphy v. Candor, 263 Ill. App. 226. The right of action in Edison on which plaintiffs rely is based on the charge that the directors of Edison negligently sacrificed the interests of Edison and negligently permitted the waste and misappropriation of its assets by authorizing the waiver of any right to the refund and the surrender of the Northern common stock for cancellation. Plaintiffs say in their brief, in speaking of the latter transaction, the directors "completely overlooked the substantive corporate interests of Edison" and they "overlooked the necessity of getting full value in return." There is no charge of fraud, personal benefit or ulterior motive on the part of any Edison director, or that any stockholder of Edison received any advantage or sustained any loss from the acts complained of which was not equally shared in or sustained by plaintiffs and all other shareholders of Edison.
No presumption of want or gross inadequacy of consideration arises from the fact that ten of the seventeen directors of Edison were also ten of the eleven directors of Northern. In ...