Stokes v. Continental Trust Co.

The plaintiff’s contention is that, when the Continental Trust Company increased its capital stock, he, being a stockholder, had the right, in preference to any other person, to subscribe at par for the new stock in proportion to the number of shares of original stock held by him. This right, he insists, is inherent, presumptive, and vested, and that it is not within the power of all the other stockholders or officers of the corporation to deprive him of it. All the text-writers on corporations range themselves in support of these contentions, and there are many dicta to be found in cases which sustain them. It would unduly extend this opinion to quote from these at length, nor is it necessary, because every text-writer who has dealt with the sub

“When the capital stock of a corporation is increased by the issue of new stock, each holder of the original stock has a right to offer to subscribe for and to demand from the corporation such proportion of the new stock as the number of shares already owned by him bears to the whole number of shares before the increase. * * * The corporation cannot compel the old stockholders, upon their subscription for new stock, to pay more than the par value thereof.”

It is important, in reaching a conclusion, in the absence of 'any controlling authority in this state upon the precise question involved, that we should have before us the facts which are determinative of the question presented. There is nothing in the charter of the trust company, there is no statutory law, nor any resolution of the directors or the stockholders, requiring that the new issue of stock should be distributed among the existing stockholders. On the contrary, it appears that the officers and trustees recommended the increase, and the stockholders voted for" it. for the purpose of selling it to Blair & Co. Nor do we understand that it is seriously contended that, in acceding to the proposition of Blair & Co. to sell the entire new issue at the price fixed, there was any discrimination against any stockholder, or that there was any bad faith bn the part of the officers, or that all the stockholders did not share equally in the benefits arising from the arrangement which was consummated.

. By a process of elimination, therefore, we may pass over such of the cases cited as involve questions relating to the issue of new stock, wherein, whether by force of a statute, or by the charter of the corporation, or the resolution of the directors, express provision is made for distribution among existing stockholders. So, too, we may eliminate the cases wherein the directors of the company were engaged in perpetrating fraud upon stockholders, or where, without authority of law or the vote of stockholders, or other acts clearly ultra vires, the directors, attempted to increase the capital stock. In addition, we have cases cited in' support of plaintiff’s proposition from other states, beginning with the old case (decided in 1807) of Gray v. Portland Bank, 3 Mass. 364 , 3 Am. Dec. 156 , wherein we find language in the opinion of the court which does support the contentions of the plaintiff as broadly as they are made. From this case, and others following it, the views of the text-writers in their summary of the law on the subject have undoubtedly been taken.

Passing from the decisions of other states, which, however valuable as arguments, are not controlling, we should seek in the decisions of our own state for guidance and help upon a question of so much importance to our own citizens. Strange as it may appear, though the question must have frequently arisen, we are referred to but three cases in which the subject was discussed or passed upon. These are Miller v. Illinois Central R. Co., 24 Barb. 312 ;

The first of these cases (Miller v. Illinois Central R. Co., supra) was decided by the General Term of the Supreme Court in this department in the year 1857. The facts were that R. and G. L. Schuyler held a receipt from the Illinois Central Railroad, which obligated the railroad to issue in payment of a loan 750 shares of the issue of the second million of the company’s stock, when authorized by the directors. The Schuylers assigned to the plaintiff, Miller, the right to take and receive to his own use 399 shares of the stock, to be issued as set forth in the receipt. The issue was authorized and made, and the receipt was surrendered by the plaintiff to Schuyler, and he received his 300 shares of the stock. Previously the company resolved to issue 70,722 additional shares, and also determined by the same resolution to whom they should be issued, and what number to each person. If these 70,722 shares had been distributed to the previous holders of stock in proportion to their holdings, the 300 shares subsequently acquired by the plaintiff would have been entitled to 562 shares of the.new stock. The plaintiff claimed—and in this he was sustained at Special Term—• that he was entitled to this latter amount. The judgment rendered in Miller’s favor by the Special Term was reversed by the General Term, and a new trial granted, it being held, first, that if, as between the Schu3ders and the plaintiff, the latter had been entitled to the 562 shares of new stock, the company, not having any notice of his rights, was not bound by them; and, second, as between him and the Schuylers, he was not, at the time when this stock was created, and his right to it is said to have accrued, the owner of the 300 shares upon the strength of his title to which he based his claim; and, third, the ownership of these 300 shares did not necessarily nor so far as the evidence shows, entitle the holder to the 562 shares, and the distribution or delivery of them to him, whoever he may have been. The criticism made by the respondent upon this case is that, so far as appears, Miller was claiming the new stock as a gratuity, and without any payment for it whatever. Mr. Justice Peabody, who wrote the opinion in that case, discussed the three points upon which the decision turns, the second of which was that, if the plaintiff was the owner of the 300 shares at the time of the issue of the new stock, he had no absolute right as such owner to a distributive allotment of the new stock.

In the second case (Matter of Wheeler, supra), which did not involve the question here presented, and is valuable only as containing a dictum of a learned judge, it was said:

“As I understand the law, all these important stockholders had a right to share in the issuing of this new stock in proportion to the amount of the stock held by them. And if none of the stock was to be apportioned to the old stockholders, they had certainly the right to have the new stock sold at public sale, and to the highest bidder, that they might share in the gains arising from the sale. In short, the old stockholders, as this was good stock and above par, had a property in the new stock, or a right at least to be secured the profits to be derived from a fair sale of it, if they did not wish

to purchase'it themselves ; and they have been deprived of this by the course which these directors have taken with this new stock, by transforming or issuing it to themselves and others in a manner not authorized by law.”

The third case (Currie v. White, supra) contains an expression by Judge Folger upon the question which he was discussing, and in which a majority of the court agreed, favorable to the plaintiff. He says, referring to the facts of that case:

“The contract between the parties is an agreement for the sale of shares of stock, the shares to be delivered in the future, and the purchase price then to be paid with interest This contract was executory. * * * But the parties meant more than this by their contract. The one meant to buy and the other agreed to deliver these shares, with all the rights which attached to them at the time of making the contract. One of these rights was to take new shares upon any legitimate increase of the capital stock, which right attaches to the old shares, not as profit or income, but as inherent in the shares in their very creation. Atkins v. Albree, 12 Allen, 359 ; Brander v. Brander, 4 Ves. (Summer’s Ed.) 800, and notes.”

So far as the cases in this state are concerned, therefore, they leave the precise question which is presented for our determination an open one; and we are at liberty to consider it as we would any other which has been frequently discussed, but never authoritatively decided. In approaching it, it is important, in speaking of the right which a stockholder has, that we should clearly distinguish between a case where the directors propose to issue new stock and sell it at par; and one wherein it is proposed to sell it at its actual or market value, when it has increased, as in the present instance, to a value more than four times its par value. And another distinction which is important is whether the right which a stockholder has is one which would entitle him to subscribe to the new stock which issued at its actual value, or is a right to subscribe for it at its par value. It is to be noted that the plaintiff here did not offer nor ask to be allowed to subscribe at the price which Blair & Co. were willing to pay to the trust company for the stock when increased. What he insisted upon was that, regardless of its value or the price that the corporation could obtain for it, he had an inherent right to obtain the stock at par. If wrong in this position, even though he might have had a right to his proportion of the new stock, had he offered to pay for it the same price offered to the trust company by Blair & Co., he cannot recover. He stands or falls in the position which he took, and has throughout the controversj’' maintained—that, notwithstanding the corporation could sell the increased stock to Blair & Co. for $450 a share, he was entitled, upon payment therefor at par, to receive the same number of shares of the increased stock that he held of the original stock of the company.

Much might be said, and considerable force may be derived from the views of text-writers and from the expressions "in opinions, in support of the proposition that a stockholder, as against an outsider, has a primary or pre-emptive right to stibscribe for any increase of stock made by the corporation. This primary or preemptive right, however, to subscribe at par for increased stock which is to be issued at par, or, where the value of the stock is

“The ownership of stock of the company gave to the owner an undivided interest as owner in tlie property of the corporation—an interest which bore the same proportion to the whole property as his shares did to the whole number of shares. This right was a right or proportionate interest in the assets of the company, and in the proceeds and benefits of the property of the company. These assets were the property of the corporation. This was a right not to any part of the assets separately and exclusively; not a right to an immediate exclusive possession of or property in any particular part of those assets; not a right to an immediate distributive share of the assets or any part of them; and no more a right to a distributive share of any stock of the corporation belonging to itself than to any other property belonging to it. Erima facie all the property of the corporation -was dedicated to- its use for the purpose of advancing the enterprise for which it was organized; and any stock it might own, whether of its own capital or that of any other company, like any other property, was to be used, in the discretion of its officers, to accomplish that end in the manner most beneficial to the corporation and corporators, as such.”

This case, as well as the case cited by the plaintiff, of Reese v. Bank of Montgomery County, 31 Pa. 78 , 72 Am. Dec. 726 , furnishes reason for the defendant’s contention that the right to issue the netv stock was like a corporate franchise, or any other property of the corporation which it held in trust for the benefit of all its stockholders, and which was to be administered by the stockholders or the directors'for the best interest of’all, and in such manner that no one should gain any unfair advantage or benefit therefrom "to the exclusion of or at the expense of any of the others.

In nearly all the cases relied upon by the plaintiff, a court of

Upon a sale of increased stock, the property of the corporation, there may be, as here, two interests to be considered—one, of the stockholder; and the other, that of the corporation. Both are secured in case the company receives and the stockholder pays as much for the stock as would be paid by an outsider. But if a single minority stockholder, against the view of the majority, can obtain stock at par when the company can obtain a greater sum from an outsider, which the stockholder is unwilling to give, then the company suffers, and a single stockholder, at the expense of the majority, gains. This is tantamount to saying that the right of a single stockholder to obtain increased stock at par is greater than the rights of the officers and other stockholders, and is greater than the rights of the corporation itself. We do not think that the primary right which he may have to subscribe for the new stock can be extended so as to menace the best interests and welfare of the corporation and its stockholders, regarded as a whole. It cannot be tliat the rights of a single stockholder, when in conflict, are paramount to the rights of the corporation itself.

It is to be noted that the proposition of Blair 8c Co. was conditioned upon its receiving all of the increased stock. Had the plaintiff offered to pay the same price for his proportion, then a situation would have been presented where the interest and primary right of a stockholder to subscribe would be in direct conflict with what the officers and other stockholders regarded as for the best interests of the company. What our decision would be, were such a question before us, it is unnecessary to say. Not being before us, we do not decide it.

As pointed out, we are not controlled by any statute in this state, nor does the charter of this company forbid it; and we are therefore free to apply the rule well expressed by Chief Justice Sterritt in Morris v. Stevens, 178 Pa. 563 , 36 Atl. 151 , wherein he says:

“In general, the present holders of stock have a primary right to subscribe, in proportion to their holdings, for any new issue. The stockholders themselves certainly may determine otherwise, and order a sale to the public, and payment of the proceeds into the treasury. But this is exceptional, and the exercise of a reserve power, which should not be permitted unless there is a clear intent of the stockholder to do so.”

In the case at bar the intent of the stockholders was made manifest; all, including the plaintiff, who voted, having voted for the increase, and all, excepting the plaintiff and one other small stockholder, having voted to sell the stock at the price offered to Blair & Co. It is contended by the defendant that the plaintiff is estopped from challenging the acts of the other stockholders and officers because he knew that the purpose and object of the increase was to carry out the arrangement which the office'rs had made to deliver all of the increased stock to Blair & Co. In one aspect,

We refrain, however, from deciding this case upon the question of whether or not the plaintiff is estopped, preferring, as we do, to place our decision upon a broader ground, viz., that, irrespective of our view upon the question not involved—as to whether or not the plaintiff had the primary right, had he offered to pay the same amount as Blair and Co., to subscribe for his proportionate share of the increased stock—we are of opinion that the primary,- preemptive, inherent right, or by whatever term designated, which the plaintiff had, did not enable him to subscribe at par for any portion of this stock which the trust company could sell for $450 a share to an outsider, and which sale was made in good faith, with a view of having the proceeds placed in the treasury of the company, and of bringing in “a group of men who could bring large deposits and profitable business to the company,” all of which was to redound equally to the benefit and advantage of the corporation'and all of its stockholders.

VAN BRUNT, P. J., and HATCH, J., concur. PATTERSON, J., concurs in result.

(concurring). I concur, in the main, in the views expressed by Mr. Justice O’BRIEN, but wish to add some further observations:

The statute regulating the increase of the capital stock of a corporation (sections 44, 45, and 46 of the stock corporation law [Laws 1892, p. 1836, c. 688]) provides that such increase, within the limitation, if any, prescribed by law, may be made by the unanimous consent of the stockholders, or by the vote of the holders of the majority of the stock, either in person or by proxy, at a meeting duly called for that purpose. The statute is. silent as to whom,* or the terms upon which, the increase of stock shall be issued. These questions are therefore to be determined by the application of common-law principles. Where the stockholders all agree, of course no question could arise; but where the majority favor the increase of the capital against the wishes of the minority, or upon terms o'pposed by them, then important questions are liable to arise. In that event, I think the statute confers implied power upon the majority to determine whether the stock shall be issued at par or above par, at what may be deemed its actual value, in view of the value of the assets of the existing corporation, the right to ultimately share in which the holders of the new issue of stock will thus acquire. The action must be taken, however, in a manner that will secure the existing stockholders an opportunity of exercising their pre-emptive right of subscribing for a share of the increased capital stock in proportion to their holdings of the original. I think, for instance, that the sale of the new stock to the highest bidder, upon sealed proposals, would be a violation of this right. A stockholder, prior to the increase, has a right to a voice in the management, and to a share of the assets of the corporation, on final dissolution, in the proportion that his holdings bear to the entire outstanding capital. These rights are materially affected by an increase of the capital stock, and such increase must therefore be made in a manner to enable him to become the purchaser of such a proportion of the increased capital stock as will preserve his right to the same proportion in the assets on final liquidation as he originally had, and also the same voice in the management of the corporation. Moreover, the immediate effect of an increase in the capital stock of a corporation, the value of which is above par, would be to depreciate the value of the original stock, unless the new capital is issued and sold at a valuation equal to that of the original issue. It is therefore manifest that, if the holders of the original stock are' not to purchase the entire new issue, it is to their interest that the increase of stock be issued, not at par, but at what will be its actual value, as near as the same may be ascertained. The rule contended for by the plaintiff would be equitable