A shareholder brought suit after the corporation allegedly refused to take proper steps to assert its rights. The tax challenged in the suit had been assessed against the Chicago, Rock Island, and Pacific Railroad Company. The decree sought would discharge the company from paying that tax. The corporation itself was not made a party to the suit.
Issue
When a shareholder sues because a corporation refuses to act to protect corporate rights, may the suit proceed without the corporation being joined as a party defendant? Must the corporation be before the court so that any decree on the merits will bind it?
Rule
A shareholder may maintain a suit when the corporation refuses to act only on the ground that corporate rights are involved. Because the relief sought is on behalf of the corporation and any benefit to the shareholder is merely incidental, the corporation is an essential party in interest and must be made a party defendant; otherwise a court of equity will not take cognizance of the bill.
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One of 10 multiple-choice questions for this case. Pick an answer to see why.
Nina Patel owns shares of Lakefront Freight Lines, a fictional trucking corporation based in Cleveland, Ohio. After the board refuses to challenge a county license fee imposed directly on the corporation, Nina files a bill in equity against the county treasurer seeking a decree that would relieve the corporation from paying the fee, but she does not name Lakefront Freight Lines as a party.
How should the court rule on a demurrer arguing that the suit cannot proceed as filed?
Explanation. A shareholder may sue when the corporation refuses to act only because the rights involved are corporate rights. When the requested relief would run to the corporation, the corporation is the essential party in interest, and equity will not entertain the bill unless the corporation is made a party defendant so the decree will conclude it. Here, the fee is imposed on the corporation and the decree would free the corporation from paying it. (Derived from Davenport v. Dows (n.d.).)