that under the provisions of the contract requiring that the other members of the board of directors of the California Development Company should be "acceptable-that is, not objectionable"-to the Southern Pacific Company, it was possible for the latter company to exclude, and it did exclude, from said board all save persons who would be subservient to the wishes and desires of the Southern Pacific Company; that accordingly the resignation of a fourth director was secured, and two persons were caused to be elected to fill the vacancy in succession, one after the other, and that both are wholly subservient to the Southern Pacific Company; that the object of the Southern Pacific Company in entering into the said contract was the saddling of debts for the maintenance of its right of way upon the California Development Company; that the Southern Pacific Company has railroad interests of vast magnitude and importance compared with which its interests as creditor of the California Development Company is insignificant; that it is indifferent to the interests of the bondholders and stockholders of said corporation; that since securing control of the California Development Company and dominion over its property and assets, the Southern Pacific Company has made large expenditures of money loaned and advanced to the California Development Company under said contract for the benefit of itself-the Southern Pacific Company; that said expenditures have not been made for the benefit of the California Development Company or the said Mexican Company at all, and have not benefited either or both of said companies, and it is charged that upwards of $300,000 has already been expended by the Southern Pacific Company in this way for his own benefit and without benefit to the California Development Company and the said Mexican Company, and saddled upon the California Development Company in the form of a debt to the Southern Pacific Company. Plaintiff further alleges that it is the purpose of the Southern Pacific Company so to manipulate the affairs and assets of the California Development Company that the holdings and interests of the stockholders will be rendered wholly valueless, and the Southern Pacific Company further purposes and intends, after having eliminated the rights and holdings of all the present stockholders of the California Development Company, to sell the valuable water rights of the California Development Company at a large price to the Reclamation Service of the United States, and to reap all the profit and benefit thereof themselves and to the injury of the plaintiff and all other stockholders of the California Development Company; and to accomplish this purpose by means of divers and sundry fraudulent and unlawful devices carried out through its agents and servants who have been made president and directors of the California Development Company, and by virtue of the control and dominion which the Southern Pacific Company has over the California Development Company and its assets and affairs under said contract.

To this amended bill of complaint both the defendants, appearing by the same counsel, demurred, on the ground that the plaintiff, by his own showing, was not entitled to the relief prayed for against the defendants or either of them; that the court had no jurisdiction to hear or determine the suit, and that the bill of the plaintiff is wholly

without equity. The court sustained the demurrer and entered a decree dismissing the bill. The plaintiff has appealed.

It is urged as an objection to the bill that it is without equity, because the money loaned under the contract which it is the object of the suit to cancel has not been restored, and there is no offer of restoration. In our opinion the objection is based upon an erroneous view of the cause of action. The plaintiff does not bring this suit to establish any individual right of his own, but for the benefit of the California Development Company, of which he is a minority stockholder. He has received nothing in the transaction which is the subject of this controversy, and therefore has nothing to restore. His authority to speak for the corporation is to pray the court to do equity in determining the rights of the parties. But the important feature of the cause of action as set forth in the amended bill of complaint is that there is nothing to restore to the Southern Pacific Company by the California Development Company or its stockholders. It is distinctly alleged that the "Southern Pacific Company has made large expenditures of money loaned and advanced to said California Development Company, under said contract * * * for the benefit of itself-the said Southern Pacific Company; that said expenditures have not been made for the benefit of said California Development Company or said Mexican Company at all, and have not benefited either or both said companies * * * ; that upwards of $300,000 has already been expended by said Southern Pacific Company in the above way, * and without benefit to said California Development Company and said Mexican Company, and saddled upon said California Development Company in the form of a debt to said Southern Pacific Company." There are other allegations in the amended bill charging acts on the part of the Southern Pacific Company to secure the control of the California Development Company for the purpose of making large expenditures to protect its right of way and tracks in the name of and as an indebtedness of said California Development Company and of saddling a large amount of indebtedness therefor upon said California Development. Company in the form of a loan by the said Southern Pacific Company. If these allegations are true, and they must be so treated in determining the sufficiency of the bill upon the demurrer, the Southern Pacific Company has appropriated to its own uses and purposes the money it has pretended to loan to the California Development Company, and this it has accomplished under the terms of the contract giving it control of that corporation. The appeal to equity is that the California Development Company may be relieved of this assumed indebtedness by a cancellation of the contract. In this aspect of the case it is manifest that neither the plaintiff nor the California Development Company should be required to offer to restore money the corporation has never received for its own use or benefit. If the court shall hereafter ascertain the fact to be otherwise than as alleged in the bill, it will direct the parties to do equity in accordance with such facts.

The next question to be determined is whether the contract is ultra vires. Section 12 of the act of the Legislature of New Jersey (P. L. 1896, p. 281), under which the California Development Company was incorporated on or about the 23d day of April, 1896, provides:

"The business of every corporation shall be managed by its directors, who shall respectively be shareholders therein; they shall be not less than three in number, and, except as hereinafter provided (the exception is not material in this case), they shall be chosen annually by the stockholders at the time and place provided in the by-laws, and shall hold office for one year and until others are chosen and qualified in their stead."

Under the law the control and management of the affairs of the California Development Company was committed by its incorporators to seven directors. In paragraph 2 of the agreement of June 20, 1905, the California Development Company by its president and secretary agreed to cause three members of its board of directors as then constituted to resign and in their places and steads to cause to be elected three parties to be selected for that purpose by the Southern Pacific Company. The provision of the statute that the directors shall be shareholders and shall be chosen annually by the stockholders appears to be set aside by this agreement as to three of the seven directors, and the selection of these three directors vested in the Southern Pacific Company "during the continuance of the whole or any part of said loan unpaid."

Section 13 of the New Jersey act provides that:

"Every corporation organized under this act shall have a president, secretary and treasurer, who shall be chosen either by the directors or stockholders, as the by-laws may direct, and shall hold their offices until others are chosen and qualified in their stead."

In paragraph 2 of the agreement it is provided that upon the election of the three directors selected by the Southern Pacific Company the California Development Company is to cause the other members on said board then in California to vote for and elect one of the three directors so selected and named by the Southern Pacific Company to the office of president and general manager of the California Development Company and its business. It is further provided in the agreement that in the event of any vacancy occurring in the office of director held by either of said persons elected by the Southern Pacific Company or in said office of president, then the California Development Company shall cause such person to be elected to said office as the Southern Pacific Company shall designate, provided that such president shall be acceptable-that is, not objectionable-to at least two members of the board other than those named by the Southern Pacific Company. It is further provided that in addition to having the right of nominating three members of said board of directors as provided in the agreement all members of the board shall be acceptable-that is, not objectionable-to the Southern Pacific Company. Under the agreement, the president of the corporation, instead of being chosen either by the directors or stockholders, as the by-laws may provide, is selected by the Southern Pacific Company. The law requires that the secretary like the president shall be chosen either by the directors or stockholders as the by-laws may direct. In paragraph 3 of the agreement it is provided that the president and general manager of the California Development Company so selected shall have the power to name the secretary, acting superintendent, chief engineer and consulting engineer of the corporation, the persons so named, however,

to be acceptable to at least two members of the board of directors of the corporation other than those named by the Southern Pacific Company. These provisions of the agreement are clearly contrary to the provisions of the law under which the corporation was organized, and are contrary to the laws of this state, under which it is exercising its authority and doing business as a corporation.

There is, however, another provision of the agreement to be considered in this connection. It is provided in paragraph 4 of the agreement that to further secure the loan and its repayment with interest the California Development Company agrees to procure certain of its stockholders to pledge 6,300 shares of its capital stock to be deposited with a trustee to be selected by the Southern Pacific Company, the owners of the stock to execute to the trustee so selected irrevocable powers of attorney or proxies giving to said trustee the right to vote. said stock at all meetings of stockholders of the California Development Company held after 90 days' default in payment of any installment of said loan or in performance of any other of the conditions of the agreement on the part of the California Development Company and while such default continues. Does this power of control given to the Southern Pacific Company over the affairs of the California Development Company by the transfer of a majority of its shares of stock render immaterial the method provided in the agreement for the selection of the officers of the corporation and their terms of office? In other words, if the Southern Pacific Company has secured the control and management of the California Development Company by procuring the control of a majority of its shares, and is thus enabled to elect its officers and direct its affairs, is it of any consequence that the agreement provides a method wholly at variance with the law for the selection of such officers and their terms of service?

We are of opinion that the method provided by the statute for the election of the officers of the corporation, their qualification, and their terms of service cannot be set aside even by the vote of the majority of the shareholders. But, aside from the conflict between the terms of the agreement and the law under which the California Development Company was incorporated, the action of the corporation in carrying out the terms of the agreement as alleged in the bill amounts to a complete surrender of the management and control of the California Development Company to the Southern Pacific Company, another corporation formed for a different purpose and carrying on a wholly different business. The purpose of a grant of corporate power is that the corporation shall exercise its powers and carry on its business through its own officers and agents and not through officers and agents selected by another corporation. 1 Mor. Priv. Corp. p. 431; Buckeye Marble & Freestone Co. v. Harvey, 92 Tenn. 115, 20 S. W. 429, 18 L. R. A. 252, 36 Am. St. Rep. 71. And that it shall maintain an independent corporate existence, and not surrender the control of its affairs or the exercise of its power to another corporation. AngloAmerican Land M. & A. Co. v. Lombard, 132 Fed. 721, 736, 68 C. C. A. 89. There are undoubtedly instances where the control and management of one corporation by another is justified by the character of the business in which they are engaged, and the complete harmony of

SS C.C.A.-12

interests existing between the two corporations. The control and management of the Mexican Company by the California Development Company as set forth in the bill appears to be such a case, but we have found no case where the courts have sanctioned such control and management where there are conflicting interests of the character charged in the bill as existing between the California Development Company and the Southern Pacific Company with respect to the business and affairs of the former corporation. The surrender of corporate authority on the part of the California Development Company, as set forth in the bill, is manifestly against public policy, and the contract under which the surrender is made so clearly contrary to the law under which the corporation was created that it must be declared ultra vires and void.

The defense of estoppel is not applicable to the facts as stated in the bill of complaint. If the money loaned under the agreement by the Southern Pacific Company to the California Development Company has been expended by the Southern Pacific Company for its own use and benefit, and not for the use or benefit of the California Development Company or the Mexican Company the rule of estoppel does not apply, nor does it apply to the ultra vires agreement alone. The Supreme Court of the United States in Central Transportation Co. v. Pullman Car Co., 139 U. S. 59, 11 Sup. Ct. 478, 35 L. Ed. 55, has stated the rule applicable to this case as follows:

"A contract of a corporation, which is ultra vires in the proper sense that is to say, outside the object of its creation, as defined in the law of its organization, and therefore beyond the powers conferred upon it by the Legislature is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it. When a corporation is acting within the general scope of the powers conferred upon it by the Legislature, the corporation, as well as persons contracting with it, may be estopped to deny that it has complied with the legal formalities which are prerequisites to its existence or to its action, because such requisites might in fact have been complied with. But when the contract is beyond the powers conferred upon it by existing laws, neither the corporation, nor the other party to the contract, can be estopped, by assenting to it, or by acting upon it, to show that it was prohibited by those laws."

The rule is also applicable to the further objection that the plaintiff has been guilty of laches, and is therefore estopped by his conduct from maintaining this action. Furthermore, the agreement in controversy is dated June 20, 1905. The amended bill was filed February 12, 1906. When the original bill was filed does not appear. There is therefore nothing in the record that would justify the court in determining that the plaintiff had been guilty of laches in bringing the action. In any view of the case the court cannot apply the law of estoppel to plaintiff's conduct.

The decree of the Circuit Court is reversed, with directions to overrule the demurrer.

ROSS, Circuit Judge (dissenting). I am unable to agree to the judgment in this case. The appellant sued as a dissatisfied stockholder