Einstein v. Rochester Gas & Electric Co. — 65 N.Y. St. Rep. 768

Majority

p. 768

Edwin Einstein, App’lt, v. The Rochester Gas and Electric Company et al., Resp’ts.^[1]

(Court of Appeals,

Filed April 30, 1895.)

Headnote

Corporation—Capital stock.

There is no such thing as an implied authority to increase or diminish the capital stock of a corporation. It can be increased only in the manner prescribed by its charter or some legislative enactment. No acts of its officers or agents are competent to enlarge such stock.

Appeal from an interlocutory judgment of the general term of the supreme court in the fifth judicial department, entered upon an order, which reversed an order of special term sustaining a demurrer to the complaint.

On defendants’ demurrer to the complaint.

This action is to compel the defendant, the Rochester Gas and Electric Company, to issue to the plaintiff four hundred .and eighty thousand dollars, par value, of its paid-up stock; or, in default thereof, that the defendants be required to pay to him the par value thereof. The plaintiff’s assignor, Rowley, became the owner through a contract with the Brush Electric Company, of Cleveland, 0., of the exclusive right to sell dynamo electric machines and apparatus made under the Brush patent for electric lighting and electroplating. Rowley agreed with certain persons in the city of Rochester respecting the organization of a stock company, with a capital of one hundred thousand dollars, for the purpose of introducing the Brush electric light into that city. By the agreement forty-eight per cent, of the capital stock of the company was to be paid over to Rowley, as a consideration for an assignment by him of his rights under the Cleveland contract, and, also, forty-eight per cent, of any increase of the capital of said, company. After the formation of the Rochester company, under the name of the Brush Electric Light Company of Rochester, New York, one of the defendants in this action, a formal agreement was executed between that company and Rowley; through which Rowley assigned to it his rights under the Brush patent for Monroe county. The contract contained this agreement on the part of the company (after having recited the issue and delivery to him of forty-eighty thousand dollars of paid-up capital stock as a consideration for the assignment), viz.: “That if at any time hereafter the said capital stock of the said party of .the second part shall be increased (otherwise than for stock issued for cash paid therefor at the time of such issue at par to the extent of one hundred thousand dollars [$100,000] in addition to the present capital) forty-eight per centum of the par value of such increase shall be issued and delivered to said party of the first part, or his assigns, full paid up. * * * And the said party of the second part for itself, successors and assigns, covenants, promises and agrees to and with said party of the first part, his successors and assigns, that in case at any time hereafter the capital stock of said- party of the second part shall be increased (otherwise than for cash paid for the

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said increase at the time at par to the extent of one hundred thousand dollars [$100,000] in addition to the present capital), that then and in that case said party of the second part will issue and deliver to the said party of the first part, his successors or assigns, forty-eight per centum, in amount, of the par value fully paid up, of such increase as a part of the consideration for this assignment. * * '* It is expressly agreed between the parties hereto that the party of the second part shall not sell or dispose of any of its interests, franchises or rights under this contract without the consent of the party of the first part, or his assigns, in writing. This agreement shall not, however, prevent any stockholder from disposingrof his stock if he elect so to do.” It was subsequent to the making of this latter agreement, that the plaintiff became possessed, by assignment, of Rowley’s interest and rights under the various agreements. Subsequently, with the plaintiff’s consent, there was an increase of its capital stock to the extent of one hundred and fifty thousand dollars in cash, in addition to the one hundred thousand dollars stated in the contract between the company and Rowley; thus making the whole capital stock of the company two hundred and fifty thousand dollars. Some years later a consolidation was proposed between the Brush Company and two other electric light companies in that city and the Rochester Gas Company. This project of consolidation, however, was abandoned, because of the inability to secure the plaintiff’s waiver of his right to forty-eight per cent, of an increase in the stock of the Brush Company of Rochester under his contract; such increase being desired in the capital stock of all the four companies upon consolidation. Thereupon, the Rochester Gas Company and the two other electric light companies of Rochester consolidated into a single corporation, called the Rochester Gas and Electric Company, the present defendant, with a capital stock divided into forty-three thousand shares of one hundred dollars each. Of this stock a certain amount was apportioned to the stockholders of each of the consolidating companies and there were retained in the treasury of the consolidated company twelve thousand five hundred shares, which the directors were authorized to issue in the purchase of not less than a two-thirds interest i,n the capital stock of the Brush Company, at the rate of five shares of the stock of the consolidated company for one share of the Brush Company. In pursuance of this plan the new company acquired .all of the Brush Company’s stock in exchange for the twelve thousand five hundred shares at the rate mentioned. The Rochester Gas and Electric Company, in this way, acquired the control of the Brush Company and the practical ownership of all its properties; but the corporate organization of the Brush Company has been kept up, with a board of directors and with officers, although the persons constituting the board of directors are also directors of the consolidated corporation.

These facts appear in the complaint of the plaintiff, and his claim is that, to all intents and purposes, the Rochester Gas and Electric Company is the Brush Company, and that, through the

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process by which the shares of the stock of the Brush Company were acquired by the Rochester Gas and Electric Company, the capital stock of the former company was virtually increased by just one million of dollars, and that the directors and stockholders-of the Brush Company have, by indirect means, effected an increase of the capita] stock of the company with the view of preventing his assertion of a cJaim under his contract to receive forty-eight per centum of any increase of the capital stock.

A demurrer to the complaint, on the ground that it does not state facts sufficient to constitute a cause of action, was overruled at the special term ami judgment ordered thereon for the plaintiff. Upon appeal by the defendants to the general term, that court reversed the judgment of the special term ; but gave leave to the-plaintiff to appeal to this court from the interlocutory judgment of reversal.

George F Danforth, for app’lt; Edward Harris, for resp’t.

In the view that we take of this case, it is unnecessary to consider the appellant’s argument as to the rights-gained through his contract with the Brush Company, otherwise than with respect to the question of whether there has been an increase of the capital stock of that company. Assuming all that-he claims, in regard to his absolute right under the contract to receive forty-eight per cent, of any increase of the capital stock, we do not think it can be said that there has been any such increase effected through the transactions referred to. It may be perfectly true that the transactions with the- Rochester Gas and Electric Company, by which that company acquired all of the stock of the-Brush Company, at the rate of five shares of the former for one of the latter, was a device, adopted by the officers and stockholders of the latter company, to accomplish by indirect means what could not be done directly, because of their inability to secure the appellant’s consent, or to agree upon terms with him. But it was-a possible transaction and one which the contract did not contemplate or provide for. The language of the contract is explicit' with respect to what the company agreed to do and that is “ that in case at any time hereafter the capital stock * * * shall be increased * * * that then in that case said party of the second part (the company) will issue and deliver to the said party of the ■first part (Einstein’s assignor) * * * .forty-eight per cent. * * * of such increase.” Ho condition of things will meet that provision, unless there be, in fact, as in law, an increase of the capital stock. How the capital stock of the Brash Company, which -was $250,000, is to-day $250,000 and it is only by regarding the holdings by the former stockholders of the Brush Company of the shares of capital stock of another company, to wit: The Rochester Gas and Electric Company, that it can be supposed that the capital of the company is larger, as the result of the transactions complained of, than it was before. But that notion is quite untenable. There is but one way by which the capital stock of a company can be increased and that is in the manner authorized by its charter, or by some express authorization of the

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legislature of the state. No acts of the officers or agents of the company are competent to enlarge the capital stock; nor can the stockholders do so, save in the particular manner pointed out hy the statute. There is no such thing as an implied authority to increase or diminish the capital stock of a company. The transaction in this case was simply one whereby. all the stockholders of the Brush Company have parted with their stock to the Rochester Gas and Electric Company, upon certain terms which had been recommended by the directors. The appellant’s agreement forbade the company from selling any of its interests or rights without his written consent; but it expressly recognized and preserved the right of any stockholder to dispose of his stock if he so elected. The Rochester Gas and Electric company had the- right to purchase, and the consequence was that it became a stockholder in the Brush Company in the place of those who, by transfers of their stock, had ceased to be stockholders therein. But that has no effect upon the Brush Company’s stock, except to change the ownership; and that the Brush Company is to-day a distinct and existing organization, with its own officers and board of directors, and with a capital stock'of $250,'000, is an indisputable fact and is conceded. The argument of the appellant, that the proceedings through which the Rochester Gas and Electric Company was formed, and through which it subsequently acquired all of the stock of the Brush Company, “transmuted the stockholders of the Brush Company into stockholders of the Rochester Gas and Electric Company,” may be perfectly true; but the stock of the Brush Company never changed in form or amount. All that took nlace was a change of its ownership.

If it is true, as alleged in the complaint, that the Rochester Gas and Electric Company has “completely absorbed” the Brush Company and is infringing upon any of its rights, by the use of the patents which vrere assigned to it; or if it is, in other legally appreciable ways, violating any of its corporate rights, then the appellant, if his_contract with the company gives him such an interest in the corporation and such a standing in court as to enable him to assort his rights, or the rights of his company, is not precluded from seeking relief in a proper action. Whether his having ceased to be a stockholder (and he disclaims here any right of action in that character) affects his capacity to bring such an action, in assertion of the corporate rights of the Brush Electric Company, is a serious question about which grave doubts may be entertained, but which we are not called upon now, and which we do not undertake, to decide. The appellant’s action must fail, if there has not been that increase of capital stock which his contract contemplated and provided for and, as we think that no such change was effected by the transactions set forth in the complaint, it follows that the judgment of the general term, which reversed the interlocutory judgment overruling the demurrer of the defendants to the complaint, was correct and should be affirmed, with costs to the respondent; but with leave to the plaintiff to amend his complaint within twenty days after service upon his attorneys of a copy of the order entered upon our remittitur.

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All concur, except Bartlett, J., not voting, and Haight, J., not sitting.

Judgment accordingly.