Western Air Lines, Inc. v. Sobieski

This is an appeal by the Commissioner of Corporations of the State of California from a judgment of the superior court in an action brought by Western Air Lines, Inc., for a writ of mandate to review a final order rendered by the commissioner. By its judgment, the superior court, in substance, determined that the commissioner had exceeded his jurisdiction in purporting to act on a change in voting rights of its shareholders attempted by Western Air Lines, Inc., by means of amending its articles of incorporation.

Western, as the respondent herein will be called, is a Delaware corporation with its principal place of business in California. Western’s original predecessor was incorporated in California in 1925; thereafter, in 1928, a Delaware incorporation was effected. This Delaware corporation, under a permit

On October 10, 1956, at a shareholders’ meeting, 442,780 shares voted in favor of eliminating cumulative voting and 199,810 voted against such change. Outstanding shares then numbered 743,963 shares, requiring a vote of 371,982 to abolish cumulative voting. Included in the voting were 194,278 proxies obtained prior to sending the explanatory letter and the obtaining of the negotiating permit. On October 15, 1956, Western applied for a supplemental permit to effect the elimination of the provision for cumulative voting from its articles. After notice to all shareholders, a hearing on the fairness of the proposed amendment was held by the commissioner. Upon conclusion of the hearing, the commissioner made detailed findings of unfair, unjust and inequitable actions and conduct by Western and its management. Among the findings made by the commissioner were specific findings that indicated that Western’s business in California was of a substantial nature and that California residents were the holders of over 30 per cent of the outstanding shares in Western.

Western’s certificate of incorporation, as permitted by the laws of Delaware, contained an article providing for cumulative voting and an article reserving the right to “amend, alter, change or repeal any provision” in the certificate. The stock certificates issued by Western also contained a written provision to the effect that by acceptance thereof the holder “assents to and agrees to be bound” by all the provisions of the certificate of incorporation. The final step to effect amendment of the articles of incorporation under Delaware law is the filing of such amendment with the Delaware Secretary of State.

What the commissioner described as his “terminal findings” were, in essence, that Western’s management was de

On this appeal, the commissioner vigorously contends that his findings of fact must be accepted as the controlling facts of the case, and respondent, as staunchly, contends that the court’s findings of fact must be accepted as controlling. The rule set forth in Code of Civil Procedure, section 1094.5, subdivision (b), is supported by the language in Allen v. Railroad Commission, 179 Cal. 68 , 74-75 [ 175 P. 466 , 8 A.L.R. 249 ], where in considering a similar problem with relation to jurisdictional findings by a commission, it is said: “ ‘It is plain, and indeed it has in effect been decided, that the declaration in that section that “findings and conclusions of the commission on questions shall be final and not be subject to review, has to do with the commission’s determination upon questions of fact within its jurisdiction. When the question, ever one of mixed law and fact, goes, as here, to the jurisdiction itself, when the whole controversy revolves around the inquiry as to whether or not the corporation is a public utility, to say that the determination of the commission upon this matter is final and conclusive and is not subject to review, is the equivalent of denying to a petitioner a hearing upon a right carefully preserved to him by the language of section 67 itself. . . ”

“ ‘Thus we are brought to a consideration of the evidence upon which the commission acted in holding this plaintiff to be in tolo a public service corporation.’ ”

People v. Lang Transportation Co., 217 Cal. 166 , 171 [ 17 P.2d 721 ], sets forth the proper rule as follows:

Insofar as the findings of the commissioner and the court pertain to the question of commissioner’s jurisdiction to hold a hearing in circumstances such as those here disclosed, it would appear that the plain language of section 25009 [subd. (a)] of the Corporations Code providing that “ 1 [s]ale’ or ‘sell’ includes every disposition, or attempt to dispose, of a security or interest in a security for value. ‘Sale’ or ‘sell’ includes all of the following ... an exchange; any change in the rights, preferences, privileges, or restrictions on outstanding securities” persuades us that the court below erred in finding that the commission had no jurisdiction to act in this matter. Many cases hold that where the Corporate Securities Act is violated by solicitation of sales of stock in California, the Corporate Securities Act applies even though issuance of the stock and the transfer of title are to take place in a foreign state. (People v. Sears, 138 Cal.App.2d 773 , 791 [ 292 P.2d 663 ].) Furthermore, even criminal sanctions may properly be imposed under the above-stated rule where the main effectuation of a sale or transfer of stock takes place in California although the ultimate act may take place extra-territorially. (People v. Alison, 189 Cal.App.2d 201 , 205 [ 10 Cal.Rptr. 859 ].)

People v. Rankin, 169 Cal.App.2d 150 [ 337 P.2d 182 ], specifically holds that even though the last act necessary to the issuance of a security such as the signing of documents occurs outside of California, the Corporations Commissioner is not thereby deprived of jurisdiction over the subject matter.

Respondent cites Robbins v. Pacific Eastern Corp., 8 Cal.2d 241 [ 65 P.2d 42 ]; B. C. Turf & Country Club v. Dougherty, 94 Cal.App.2d 320 [ 210 P.2d 760 ] and Jones v. Re-Mine Oil Co., 47 Cal.App.2d 832 [ 119 P.2d 219 ], to the effect that the commissioner has no extraterritorial jurisdiction, and that such jurisdiction as he has is limited to acts done or proposed to be done in California. The Robbins ease, supra, on page 284, contains the following language: ‘‘It, therefore, follows that even if it be assumed that the negotiations in

B. C. Turf & Country Club v. Daugherty, supra, dealt with a state of facts which the court felt did not amount to the solicitation or the type of preliminary negotiation requiring a permit under California law. On page 332 of that opinion, it is expressly stated: “. . . the discussions had in California by Fraser during his short visit in September, did not amount to solicitation or the type of preliminary negotiation requiring a permit under California law.” The opinion further contains the following language relative to the Corporate Securities Act (p. 329): “From a standpoint of interpretation, there can be no reasonable doubt but that these provisions of the statute require a foreign corporation to secure a permit to solicit a sale of its stock in this state, or to engage in preliminary negotiations looking towards such sale, even though the issuance of the securities and the transfer of their title will, in good faith, be completed in a foreign state. The sections quoted clearly prohibit a foreign corporation from soliciting in this state a sale of stock of its own issue without first securing a permit, even though in good faith the issuance of the stock and transfer of title are to take place in the foreign state. We also have no doubt that, although such a regulation may impose some restraint on interstate commerce and place some restriction on free speech, it is a valid exercise of the state’s police power, and is not unconstitutional. It is true that in the Robbins case, supra, these problems were expressly left open and not decided, and that no other California case seems to have expressly determined these questions, but the suggested construction is so clear that reasonable minds cannot differ thereon, and the question of constitutionality has been so long settled that citation of authority would be superfluous.”

As we interpret Jones v. Re-Mine Oil Co., supra, 47 Cal.App.2d 832 , that ease, insofar as it relates to the Corporate Securities Act, appears to rely upon the Robbins case, supra, and states at page 840: “All the parties here did go in person to Nevada; they there organized a corporation; they there paid for and had issued shares of stock in that corpora

The case of Transportation Building Co. v. Daugherty, 74 Cal.App.2d 604 [ 169 P.2d 470 ], relied upon by Western, was one wherein a corporation requested approval of the amendment of its articles of incorporation to change its stock structure. The appellate court upheld a trial court’s determination that the commissioner had acted improperly in denying such permit since such reorganization was an internal affair of the corporation. It appears that at the hearing held by the corporations commissioner, stockholders were invited to attend but none did; and the court based its opinion upon the ground that the commissioner did not find that the plan was unfair, unjust, or inequitable,- nor that a fraud would-be worked upon those who would acquire the new stock. On page 615 it is said: “There was no dispute whatever as to the facts, and there was no failure to disclose any facts in connection with the proposal. It is a fair, just, and equitable plan unless it is the reverse. It is an honest plan if it is not dishonest. There is no middle ground. The deputy commissioner evidently thought there was, and that without any finding or evidence to support a finding that the plan was unfair, unjust or inequitable, it was his duty to refuse the permit because of his opinion that the shareholders should be able to work out a better deal for themselves.” The quoted language clearly distinguishes the instant case where proper findings were made under the relevant Corporate Securities Act sections.

Western earnestly insists that under the authority of Southern Sierras Power Co. v. Railroad Com., 205 Cal. 479 [ 271 P. 747 ], the commissioner had no jurisdiction to act upon the amendment of the articles here proposed, again contending that such amendment is essentially an internal affair of the corporation. The Southern Sierras case was considered in Gillis v. Pan American Western Petroleum Co., 3 Cal.2d 249 [ 44 P.2d 311 ], where it is put in its proper framework. In the last cited case, on page 252, it is said with reference to the Southern Sierras case: ‘1 The court held that the commission was without jurisdiction, for the reason that it was never intended by the Public Utilities Act of this state ‘to subject

Western also urges that the case of Order of United Commercial Travelers of American v. Wolfe, 331 U.S. 586 [ 67 S.Ct. 1355 , 91 L.Ed. 1687 , 173 A.L.R. 1107 ], sustains the proposition that the commissioner had no jurisdiction to act as he did here. A reading of that case persuades us that its holdings are necessarily restricted by the facts therein to fraternal insurance associations. There were a number of such cases before the United States Supreme Court before the decision in Wolfe, and the court seems to.have treated these cases as unique and to have established rules of law applicable only thereto.

It would appear that the provisions of the Corporate Seeurities Act here before us are a proper exercise of legislative discretion in requiring that corporate dealings with residents of this state be authorized by the Commissioner of Corporations, particularly where such corporation does a substantial amount of business within the state, and the act is not violative of the constitutional clauses of equal protection, contract, due process and full faith and credit if such legislative enactments operate equally upon such foreign corporations and domestic corporations in this state.

Furthermore, it appears here that since 1929 Western has recognized and submitted to the continuing jurisdiction of the California Corporations Commissioner. At that early date Western applied for and was granted a permit by the commissioner to allow the exchange of its shares for those of its California predecessor. At that time, the permittee represented to the commissioner that the shareholders of the California corporation would not be hurt in any way by the exchange. If the exchange had not taken place, the shareholders could not now be deprived of their right to cumulative voting, for a California corporation, by legislative act (Corp. Code, § 2235) must provide its shareholders with the right to vote cumulatively for directors. Thus it is apparent that the condition agreed to by Western as a basis for the original exchange of stock now tacitly prevents the company from

Western complains that the commissioner, since the institution of this action, has created a new class of foreign corporation called a pseudo-foreign corporation, and urges that such definition of such corporation is mere fiat; that the commissioner has usurped the function of the Legislature which has seen fit to divide corporations into only two classes— domestic and foreign; and that the commissioner has seen fit by his arbitrary definition to create a third. Western’s position in this respect is not well taken. The commissioner did not create any new class of corporation. He merely named a class of corporation which has, in effect, existed for many years, one with its technical domicile outside of this state but one which exercises most of its corporate vitality within this state. Unless it can be said that the Corporations Commissioner’s characterization of such corporation as “pseudo-foreign” is arbitrary, it would appear to be a matter well within his administrative discretion. The concept of a pseudo-foreign corporation as defined by the commissioner and the well established concept of “commercial domicile” of a corporation appear to us to be founded upon reality.

There appears to be little difference in difficulty of concept between that of commercial domicile and that of pseudo-foreign existence. Bach would appear to be descriptive of a particular type entity and neither would appear to have been created by a fiat or definition but rather by the nature, operation and establishment of certain corporations and the transaction of corporate business. For an interesting discussion of the concept of commercial domicile, see the case of Southern Pacific Co. v. McColgan, 68 Cal.App.2d 48 [ 156 P.2d 81 ].

The fact that since the commencement of this action the commissioner has seen fit to enunciate certain administrative rules which will be applied when dealing with a pseudo-foreign corporation does not indicate any abuse of his discretion. Such corporations have existed for many years, and naming them does not change their nature. Contrariwise, it would appear to be a just and fair administrative step to preinform those interested in such corporations as to the standards which will be applied by the commissioner in considering various applications and granting various permits.

Western properly contends that there is nothing basically evil in provisions giving shareholders the right of straight voting instead of giving them the right of cumulative voting.

It is certainly equally likely that the Legislature, by eliminating and failing later to reenact the sections requiring foreign corporations to provide for cumulative voting, intended to allow the appraisal of the fairness of the corporate structures of foreign corporations to be examined and appraised by the commissioner within reasonable limits of discretion, as it is that such legislative action was a declaration of public policy. It seems patent that if the Legislature may provide that all domestic corporations shall have cumulative voting, the commissioner may well, in his discretion, look askance upon any corporate scheme of voting which does not contain such rights. This is not to say that under certain circumstances the commissioner, in the exercise of sound discretion, could not approve the issuance of securities in a corporation which did not provide for such cumulative voting.

When we consider the complexity of present-day corporate structure and operation, and the far-flung area of corporate activities where transportation or nation-wide distribution of products may be involved, we are persuaded that the commissioner has this discretion. To hold otherwise, and to follow the argument of Western to its conclusion, would be to say that the commissioner might have the power in the first instance to require certain rights to be guaranteed to shareholders before he would permit the sale or issuance of a foreign corporation’s stock in this state, but that immediately thereafter, by the device of amending the charter of such corporation in another state, the entire structure of that corporation, even to substantial changes in the rights of shareholders in California, might be legally effected. Such a holding would enable a foreign corporation to destroy the

This position is not without support in other jurisdictions. The mere fact that the last act here necessary to effectuate the change in the voting rights of the numerous California residents who are shareholders of Western will take place in Delaware does not of itself necessitate a finding that the commissioner for that reason was without jurisdiction in this matter. Also, a fair and impartial reading of the pertinent Corporations Code sections convinces us that the amendment here sought is a “change in the rights, preferences, privileges, or restrictions on outstanding securities” (Corp. Code, § 25009, subd. (a), supra) of such nature as to be within the contemplation of the Legislature upon enactment of those sections.

Numerous arguments relative to comity between states are advanced by Western, but none of these appear to be sufficiently cogent to invalidate the above interpretations of the Corporate Securities Act sections here involved. It would seem too evident to require protracted dissertation that the right of cumulative voting is a substantial right, and one which the Legislature may well have had in mind when it enacted the code sections here under consideration.

While not binding upon the courts of this state, the reasoning and result reached in State ex rel. Weede v. Iowa Southern Utilities Co. of Delaware, 231 Iowa 784 [ 2 N.W.2d 372 ], (State ex rel. Weede v. Bechtel, 239 Iowa 1298 [ 31 N.W. 2d 853 ], cert. den. 337 U.S. 918 [ 69 S.Ct. 1159 , 63 L.Ed. 1727 ] [same case on merits]) are persuasive of the above result. That ease, at 2 N.W.2d 395 , succinctly states: “Simply because that State [Delaware] chartered the appellee [corporation] does not require Iowa to admit it to transact business within its border unconditionally” in a case where the directors of the corporation proposed an amendment to the certificate which would change the value of outstanding stock.

Because of the foregoing the judgment of the superior court must be reversed.

This, however, raises another disagreement between the parties, the commissioner contending that this court has before it the entire record of the proceedings before the Corporations Commissioner and must therefore review the entire record, citing Code of Civil Procedure, section 1094.5, supra. Western, however, argues that since the trial court never appraised the commissioner’s findings from either the stand

There is no express grant of the right of an appellate court to conduct a review in such a case without remand, and it would appear to be of doubtful wisdom to attempt such review in a court which is constituted as an appellate court when trial courts are established for that very purpose.

Reversed and remanded. '

Fox, P. J., and Ashburn, J., concurred.

A petition for a rehearing was denied May 17, 1961, and respondent’s petition for a hearing by the Supreme Court was denied June 14, 1961. Sehauer, J., and Peters, J., were of the opinion that the petition should lie granted.