ROSS TRANSPORT INC. v.

CROTHERS
4 .2d 267 (Md. 1946)

Facts:
Derivative suit by Charles T. Crothers, for himself and other stockholders who might join and be made
parties, against Ross Transport, Inc., and Wallace Williams and others to set aside the issuance of shares
of stock to defendants, Elizabeth B. Williams, Corrine Williams, Lois Williams Young, and William B. Ross
(family of the company’s president, Wallace Williams).
The issuance and subsequent sale of shares was without opportunity to buy being given to other
stockholders, where it was not shown that the corporation needed the money so badly and was in such
financial condition that the sale of the additional stock to the two directors was the only way the money
could be obtained, nor was the evidence sufficient to show that it was arranged from the beginning who
was to get this additional stock which was part of the original authorized issue. Circuit Court ruled in favor
of Crothers.

Issue:
Whether the sale of share without giving opportunity to other stockholders valid. No

Ruling:
Under the doctrine known as the pre-emptive right of shareholders, existing stockholders, as the
owners of the business, are entitled to have that ownership continued in the same proportion, and
therefore when additional stock is issued, those already having shares are held to have the first right to
buy the new stock in proportion to their holdings. Pre-emptive rights of shareholders do not exist where
the stock about to be issued is part of the original issue, unless changed conditions make it unnecessary
to use the remaining unsold stock to obtain capital, in which event pre-emptive rights exist in it just as
they would in newly authorized stock. The doctrine of pre-emptive rights of shareholders is not affected by
identity of purchasers of issued stock, but is concerned with who did not get such stock. Action of director,
more than a year after stock had been issued and sold in violation of his pre-emptive rights as
stockholder, in voting for a declaration of a dividend on the outstanding stock, which included the stock
so issued and sold, could not be held a ratification thereof, unless his action was founded upon complete
information and he was then apprised of how those facts would be dealt with if brought before a court of
equity.

Doctrine: Even if stocks are sold, the stockholder of record remains the owner of the stocks and has the
voting right until the by-law requiring recording of transfer in the transfer book is complied with. Thus, a
proxy given by the stockholder of record even if he has already sold the share/s of stock remains
effective. In the election of directors, votes made by a proxy of the record owner using stock sold within
20 days of the election is valid; provided it is not injurious to the transferee of the stock.