Meeks v. Seawell

The "corporation act of 1938" (Ga. L. Ex. Sess. 1937-38, pp. 214-247; Ga. Code Ann., ch. 22-18), contains the law governing the organization, operation, and dissolution of corporations. No contract between the incorporators executed before a charter is applied for, when not made a part of the application for charter, is binding upon the corporation and its directors. A director and officer can not be required to account for funds of the corporation where he is not charged with withholding the same. Nor will equity enjoin a sale of the corporate assets and franchise when the procedure therefor conforms to the law. Accordingly, the court did not err in dismissing on demurrer the petition seeking only relief which the above-stated rulings would deny.

No. 15036. FEBRUARY 7, 1945. Suit by minority stockholders against a corporation, its directors, and majority stockholders for injunction and other equitable relief.

Lois Meeks, C. A. Meeks, and Ralph Meeks, as owners of a minority of stock in Carroll Publishing Company, sued Thomas M. Seawell, Lee W. Seawell, P. A. Berry, and O. W. Passavant as directors and owners of the majority stock, and Carroll Publishing Company, a corporation. The relief prayed for was an injunction to prevent the defendants from selling the assets of the corporation; to require the defendant, Thomas M. Seawell, to account to the corporation for all sums expended by him on behalf of the corporation, and for all sums which have come into his hands belonging to the corporation; that P. A. Berry be decreed not to be a director; that the petitioner, C. A. Meeks, be decreed to be a director until his successor is legally elected and qualified; that a pre-incorporation contract between the petitioners and the defendant Passavant, attached as exhibit "A" to the petition, be reformed by adding thereto a clause authorizing the petitioners to exchange their preferred stock for common stock; that the court require that the petitioners' preferred stock be converted into common stock; that the rights of the petitioners as owners of common and preferred stock be determined; and for general relief. The petition in substance alleges that the petitioners together own 30 shares of common stock and 40 shares of preferred stock in the defendant corporation. Thomas M. Seawell is the "real owner of 90 shares of the common stock, but for the purpose of qualifying the defendants, Lee W. Seawell, P. A. Berry, and O. W. Passavant, respectively, to serve as directors of said corporation he has placed one share of said stock in the name of each of said defendants." The total number of shares of the capital stock issued and now outstanding is 120 shares of common stock and 40 shares of preferred stock. The petition alleges that the original charter of the defendant corporation was granted on application of the petitioners on July 9, 1926, but in the same paragraph it is stated that it was "originally chartered under the corporate name of the Free Press Publishing Company." It is alleged that there were two newspapers published in Carroll County, one the Carroll Free Press, and the other the Carroll County Times. On October 31, 1941, the defendant Passavant entered into a contract with the owner of the Carroll County Times for the purchase of the newspaper and all equipment; and on October 28, 1941, for the purpose of consolidating the ownership and all their assets into a corporation to be known as the Carroll Publishing Company, the petitioners executed a bill of sale conveying to the defendant Passavant certain of the assets of the Free Press Publishing Company. From November 1, 1941, to February 27, 1942, the two newspapers were published under the joint ownership of Passavant and the petitioners, he being in charge of the Carroll County Times, and the petitioners, C. A. Meeks and Lois Meeks, being in charge of the Free Press Publishing Company. It was understood, however, that Passavant was to be the manager of the joint enterprise with one plant and one mechanical force. In January, 1942, Passavant stated to Ralph Meeks that someone desired to purchase both papers and all their assets. The petitioners informed him that they did not wish to sell. Later Passavant and Thomas M. Seawell approached Ralph Meeks and again proposed to purchase the petitioners' interests, Seawell stating that he was unwilling to purchase anything less than all. The petitioners declined to sell. Protracted negotiations ensued, resulting in a contract between the petitioners and the defendant Passavant, attached as exhibit "A." The contract in general provided for the incorporation and respective numbers and classes of shares of stock each should have in the same and for the management thereof. Passavant and Seawell executed another contract, attached as exhibit "B", which contract conveyed to Seawell the rights and interest of Passavant, embodied in exhibit "A." In all the negotiations Ralph Meeks spoke for the other petitioners, and it was understood that Lois Meeks and C. A. Meeks would execute a contract only upon the advice of Ralph Meeks. When the contract, exhibit "A," was presented to Ralph Meeks, he refused to sign the same until Passavant agreed to change it so that it would contain a provision giving the owners of the preferred stock in the corporation the right to convert it into common stock. The defendant, Thomas M. Seawell, was present and knew of this demand and agreement. Passavant and Seawell desired to close the transaction the next day in Carrollton, and it was agreed that Ralph Meeks, who was in Atlanta, would sign the same; that Passavant would make the change, and upon notifying Ralph Meeks the next day that the change had been made Ralph Meeks would advise the other petitioners to sign the same; and that the instruments would then be completed. Passavant notified Ralph Meeks by telephone the next day that the contract was as requested, and Ralph Meeks thereupon requested the other petitioners by telephone to sign the same. Ralph Meeks has been continuously ill since, and by reason of his illness did not for some time discover that the provision for the conversion of the original stock into common stock had either inadvertently or by oversight or misapprehension been omitted from the contract. He called the attention of Passavant to the omission as soon as he discovered it, but has been too ill to bring legal action to reform the same. The petitioners are informed that Seawell notified Passavant that he would not agree to insert the conversion provision in the contract when Passavant called his attention to the petitioners' complaint about it having been omitted. Thomas M. Seawell, being unable to purchase the interests of the petitioners, has deliberately, since becoming president and treasurer and dominant stockholder, schemed and planned to freeze out the petitioners so that he might continue the business of the corporation under the new financial arrangement. To this end he has paid and caused to be transferred to himself or members of his family certain installment notes secured by properties of the corporation, when he had, or under proper management should have had, sufficient funds belonging to the corporation to pay the same. He has paid to himself $300 out of corporate funds for a note which the petitioners allege the corporation did not owe, for the reason that the indebtedness was extinguished in the reorganization contract of the parties. Seawell, thus carrying out his design to freeze out the petitioners, has used his majority stock ownership, and his position as president, director, and treasurer, to gain illegal control of the corporation in an effort to dissolve the same and surrender its charter, and to procure the appointment of a receiver to sell its assets. Although the by-laws provide that a director must be a stockholder, and there shall be five directors, and under the contract (exhibit "A"), a stockholder must offer his stock to the other stockholders before selling it to another, yet Seawell, in order to displace C. A. Meeks as a director, placed one share of his stock in the name of the defendant Berry, and by voting his stock for Berry elected him as a director instead of the petitioner, C. A. Meeks. At the same meeting Seawell and Berry voted to adopt a resolution for the dissolution of the corporation, and on information and belief the petitioners allege that the resolution is null and void and insufficient in law to form the basis of a petition for dissolution of the corporation, for the reasons set out in their objections and defensive pleadings filed to the petition for dissolution. It is the plan of the defendant Seawell to use the votes of Berry, Lee W. Seawell, his wife, and his own vote to sell the assets upon dissolution in a manner that will be to the advantage of himself and will eliminate the petitioners. After filing the petition for dissolution to which the petitioners filed objections, Seawell, his wife, and two secured creditors petitioned the court for the appointment of a receiver for the assets of the corporation. Seawell has caused a meeting of the stockholders to be called on a day stated to consider a proposal to purchase the franchise and assets of the corporation, but he has admitted to the petitioners or the petitioners' attorney that he has no such offer. Unless restrained, Seawell will make an offer or cause an offer to be made at such meeting and the stockholders will not have reasonable opportunity to consider the same, and he will use his stock ownership to force the acceptance of such offer and make conveyances to the maker of such proposal. It is alleged that the election of T. A. Berry as a director is void, for the reason that Berry is not and has never been a bona fide stockholder, for C. A. Meeks is the legally qualified director instead of Berry; and unless the defendants are enjoined, they will, following the called meeting of the stockholders, sell the assets and franchise of the corporation and thus do irreparable injury to the petitioners. The actions for dissolution and for the appointment of a receiver should be consolidated herewith and all matters be adjudicated. The defendant, Thomas M. Seawell, has heretofore failed to account for amounts spent from funds of the corporation as expenses, and he should be required to make a full accounting of all moneys coming into his hands. The exception is to a judgment sustaining a general demurrer and dismissing the action. (After stating the foregoing facts.) Since this suit is in essence one by minority stockholders against the corporation, its directors, and the majority stockholders, challenging the authority of the majority stockholders to elect directors and the authority of the directors to manage the affairs of the corporation, and fails to set forth a charter or the by-law provision relating to these matters, we look solely to the statutory law on such subjects for the answer to the questions raised. By an act known as the "corporation act of 1938" (Ga. L. Ex. Sess. 1937-38, pp. 214-247; Ga. Code Ann., ch. 22-18), the statutory law touching these matters is set forth. It is there provided ( § 22-1827), that every corporation shall have certain powers there enumerated, among which are: (f) the power to make by-laws not inconsistent with the State and Federal constitutions or its charter, for the management, regulation, and government of its affairs and property, the transfer of its stock, and the calling and holding of meetings of its stockholders and directors; and (g) to dissolve itself. Then by the provisions of § 22-1828, other powers, subject to charter limitations, are enumerated. Section 22-1937 provides for the merger of two or more corporations, and §§ 22-1838 and 22-1839 outline the procedure for such merger. It is there required that each corporation must by a vote of its stockholders ratify the written agreement in which the terms for the merger are specified, including the plans for the operation of the new corporation. By the provisions of § 22-1840, such approved agreement must be attached to the application for the charter, and it thus becomes a part of the charter of the new corporation. Thereby is shown a legislative intent that, to be binding and effective, the agreement antedating the charter must, in the manner prescribed, be made a part of the charter itself. It seems clear, therefore, that where, as in the present case, which does not involve a merger of corporations but merely a plan for the organization of a corporation, the agreement referred to, never having become a part of the charter of the corporation, is not binding upon the corporation and will not be allowed to alter or affect the provisions of the charter, the by-laws, or the statutory powers of the corporation. It is binding neither upon the corporation nor upon the directors of the corporation. Any contrary ruling found in Slover v. Winston, 155 Va. 971 (157 S.E. 150), or decisions in other jurisdictions, will not be applied in this State, but the terms of the statute will control. By § 22-1873, it is provided that a dissolution of a corporation may be had upon a petition of the directors filed in the superior court which granted the charter. It is there required that the stockholders at a meeting called for that purpose after due notice must approve the resolution of the directors providing for an application for a dissolution, and while upon dissolution the directors become, by the terms of § 22-1875, trustees for the management of the assets of the corporation, it is further provided, in § 22-1877, that, "on application of any creditor or stockholder at any time," the judge of the superior court may "upon equitable cause being shown therefor appoint one or more persons the receivers of and for such corporation."

It appears from a consideration of the foregoing act that the petition here, which alleges no failure to comply with the statute, shows no legal defect in the petition for dissolution or the application for a receiver, and shows no violation of the provisions of the charter or by-laws of the corporation. It shows no right in the petitioners to complain on account of the proceedings, and alleges no grounds for interference by minority stockholders with the management of the corporation. Since, as indicated above, the contract here involved never became a part of the charter, the terms of such contract are not binding upon either the corporation or its directors. Therefore, its reformation as sought would be of no benefit to the petitioners, and whether or not the alleged circumstances under which the contract was executed would be sufficient in a proper case to justify a decree of reformation, such allegations are insufficient here to warrant such relief. On the question of an accounting, there are no allegations sufficient to authorize an accounting. It does not appear that the defendant Seawell is withholding any funds belonging to the corporation, or that for any reason he should be required to make an accounting. The petition shows that the director Berry owns one share of stock, although he acquired it by gift. He was thus qualified to be made a director and was, as shown by the petition, elected as a director by the stockholders holding a majority of the stock. The entire portion of the petition relating to a sale of the assets and franchise is manifestly no more than mere speculation by the petitioners as to what might occur, without any fact to justify such fear. Furthermore, the fact that a meeting of all of the stockholders had been called for the purpose of considering and deciding the question of such sale excludes any reasonable grounds for fear that such action will be taken against the will of the stockholders and the directors of the corporation. The allegations of the petition are insufficient to entitle the petitioners to any of the relief sought. It follows that the court did not err in sustaining the general demurrer thereto and in dismissing the action.

Judgment affirmed. All the Justices concur, except Wyatt, J.,absent, because of illness.