Currier v. Lebanon Slate Co.

FROM GRAFTON CIRCUIT COURT. 1. The vote of March 17, 1869, authorizing the directors to give the notes of the corporation to the amount of $2,000, upon receiving from Liscomb a transfer of one hundred shares of his stock, was in effect a vote to release him from his subscription for so many shares, and to refund to him the amount he had paid thereon. The reason assigned to the stockholders why this should be done was, that he had more stock than he was able to pay for, and, unless he could have relief in some way, the company would be obliged to stop their works, or hire money to carry them on. It was further represented, that he would thus be enabled to raise money on the notes of the company, with which to pay the assessments on his remaining stock. It is not claimed by the defendants that the corporation intended, or that the effect of the note was, to reduce the amount of the capital stock, or to extinguish the one hundred shares transferred by Liscomb; but they claim that the corporation hold the shares so transferred as property, with power to reissue the same to any subscriber or purchaser thereof.

It distinctly appears that the whole amount of the capital stock, as fixed and limited by the corporation, has never been paid in. It is certain, therefore, that prior to March 17, 1869, the directors and treasurer could not make and subscribe a certificate under oath that the amount of the capital stock had been fully paid in, and cause the same to be recorded in the office of the clerk of the town where the corporation had its principal place of business, as required by chapter 135, section 20, General Statutes. Under section 8 of the same chapter, therefore, the stockholders were individually liable for all the debts and contracts of the corporation.

It is not distinctly found in the master's report whether the corporation, on March 17, 1869, had sufficient assets to meet all its liabilities. If it had not, the vote in question would be clearly illegal, and what has been done under it should be set aside. The funds of an insolent corporation cannot be taken to buy in a portion of its capital stock at the expense of its remaining stockholders. It would be grossly inequitable to the other stockholders, and a fraud upon the creditors. Moreover, it is prohibited by ch. 135, sec. 3, Gen. Stats., which provides that no dividend shall be made, and no part of the capital stock shall be withdrawn or refunded to any of the stockholders, when the property of the corporation is insufficient, or will be thereby rendered insufficient, for the payment of all its debts; and by section 7 it is provided that any stockholder who shall receive any sum unlawfully withdrawn or refunded from the capital stock, shall, to the amount by him received, be individually liable for all the debts of the corporation then existing, or afterwards contracted, until the same is repaid, or paid to the creditors of the corporation.

2. But, assuming that this corporation, on March 17, 1869, was solvent, it becomes material to inquire whether the corporation could lawfully purchase of Liscomb one hundred shares of its capital stock, the assessments upon which he had been unable to meet.

In Salem Mill Dam Corporation v. Ropes, 6 Pick. 23, it is laid down that "no vote or act of a corporation can enlarge its chartered authority, either as to the subjects on which it is intended to operate, or the persons or property of the corporators. If created with a fund limited by the act, it cannot enlarge or diminish that fund but by license from the legislature, and if the capital stock is parcelled out into a fixed number of shares, this number cannot be changed by the corporation itself. Vide 1 Dane's Abr., ch. 22, art. 1, and the numerous authorities cited by the author."

In City Bank of Columbus v. Bruce, 17 N.Y. 507, it appears that the Columbus Insurance Co., being in full operation, with a capital of $300,000 (the amount authorized by its charter), voted, through its board of directors, that any stockholder indebted to the company on stock notes might have the privilege of paying any part or all of such indebtedness in the capital stock of the company, at a rate specified in the resolution. Under this authority stock was surrendered or transferred to the company in payment of notes, to the amount of $133,000. SELDEN, J., in delivering the opinion of the court, says, — "There seems to be no ground for questioning the validity of this transaction. I am not aware of any common-law principle which forbids it, nor is it shown to have been in contravention of any provision of the charter of the company, or any other of the statutes of Ohio. In the case of Taylor v. The Miami Exporting Company,6 Ohio 83, it was held that a bank might receive its own stock in payment of a debt, and might hold it as it did its other corporate property."

I am not prepared to say that under the laws of this state a solvent corporation may not, in good faith, and for the purpose of securing payment of a debt against a stockholder, which might not otherwise be collected without risk, delay, and expense, receive its own stock in payment therefor at its fair value, and hold the same as property; in which case it would not become extinguished, and might be reissued the purchaser thereof. But this case differs widely from such a case. The object of the vote in question appears to have been, or was declared to be, not to collect a debt due to the corporation, but to afford relief to a stockholder by taking off his hands stock for which he had partially paid, but for which he was unable to complete the payments. This was done by hiring money for the purpose, or rather by giving him the notes of the corporation to be negotiated by him, and ultimately paid by the company, and against the protest of the plaintiff. It is difficult to see how the welfare of the corporation could be promoted by hiring money, or incurring further liabilities, to purchase in one tenth of its capital stock, for which there had been no sale in the open market, and upon which no dividend had ever been declared, and for which it was extremely doubtful whether another purchaser could be found, unless the affairs of the company should improve (a condition which appearances then hardly warranted). The inevitable result was to release Liscomb from paying into the treasury of the company the balance of the assessments then made, or to which the stock was liable amounting to $8,000.

It further appears from the report of the master that two hundred and fifty shares of stock were sold by the company for non-payment of an assessment. The defendant — Liscomb — admits that he bid this off at $1 per share, and paid to the company the balance of the assessment, $3. He says this was done after consulting some of the stockholders, but he does not claim that he had any legal authority to buy it for the company. The reason that he assigns, — that unless he had done this the company would have been embarrassed, as no outside parties were present at the sale, — shows that the stock had little if any value at the time. By the report of the master it also appears that Liscomb has, since March 17, 1869, claimed to recover the sum of $1,000 so paid by him. It is not material to inquire upon what ground such a claim can be based. That question does not arise here, and the transaction is important only as bearing on the value of the stock, and the value of the stock is material as bearing upon the good faith with which the purchase by the company of the one hundred shares, October 17, 1869, was made.

If Liscomb was unable or unwilling to pay the assessments levied upon his stock, the statute afforded a remedy which the corporation was bound to pursue. A suit could undoubtedly have been maintained against him to collect the assessments; or under secs. 16 and 17 of ch. 134, Gen. Stats., the treasurer could proceed to advertise and sell the shares, or so many of them as might be necessary to pay the assessments then due, with necessary charges. If the stock had any value, it is fair to presume it would have sold for what it was worth, or for a price approximating to it. If the transaction, by which the company bought one hundred shares of its stock at $20 per share, was an honest transaction, the stock if sold in the market would undoubtedly have brought that sum, or somewhere near it. If it would not, it affords very strong evidence of collusion between Liscomb and a majority of the stockholders, by which this plaintiff cannot be bound, especially in the face of his protest seasonably made.

The plaintiff charges such constructive fraud as courts of equity recognize, and for which they set aside engagements. The action of the company relieved Mr. Liscomb from his contract to pay the overdue assessments upon one hundred shares of stock, but it involved the company in a further debt of $2,000 for one hundred shares of stock for which the company had no use, and which it is fair to presume others would have bought if they had possessed any value. The assets of the company were thus withdrawn, and appropriated to an unlawful purpose, and at the same time the indebtedness of the company was increased. All this was done at the expense of the other stockholders without the consent of the plaintiff, and against his protest. It seems clear to me that he has the right to call upon the court to interfere and prevent this wrong, and to restore matters, as far as may be done, to the condition in which they stood at that time.

3. By section 3 of the charter of this corporation, the shareholders were authorized to fix the amount of the capital stock not exceeding $200,000, and the par value of the shares. Accordingly, at the meeting of October 12, 1866, the capital was fixed at $100,000, in one thousand shares of $100 each. Did the action of the meeting of March 17, 1869, have the effect to reduce the capital stock as thus fixed and determined, and had the corporation power to reduce the capital stock in the manner then adopted?

By Gen. Stats., ch. 134, sec. 6, it is provided that a "corporation, at any meeting called for the purpose, may increase or reduce its capital stock and the number of shares therein, but the capital stock when so increased shall not exceed the amount authorized by law." This section purports to be a reenactment of section 9, chapter 141, Revised Statutes, which reads thus: "Every such company may, at any meeting called for that purpose, increase its capital stock and the number of shares therein, provided that the stock when so increased shall not exceed the amount authorized by law." It will thus be observed that the power of a corporation to reduce its capital stock, as found in the General Statutes, is new. Section 7 of the same chapter (which is a reenactment of the statute of 1855) provides that a corporation may by unanimous vote, or by the written consent of all the stockholders filed with the clerk, increase or diminish the number of its shares, and thereby increase or diminish the par value of its shares; but the capital stock shall not thereby be increased or diminished. At first view these two sections seem to be in conflict; but upon closer inspection it is apparent that the 7th section was intended to provide a mode by which the par value of shares may be diminished or increased, as a matter of convenience merely, without changing the amount of the capital stock; while the 6th section provides for increasing or diminishing the amount of the capital stock, as previously fixed and determined by the charter of the corporation or by vote of its members, whenever the circumstances or wants of the company may require a larger or smaller capital for carrying on its works profitably. If the corporation desires to increase its capital, this may be done by the issue of new shares, or by increasing the par value of the old. If it desires to diminish its capital stock, that may be done by refunding to its stockholders a definite portion of each share, or by the surrender and extinguishment of the requisite number of shares. But how this shall be accomplished when none are willing to surrender, or when all are anxious to surrender, it is not easy to determine. It cannot certainly be at the expense and against the consent of one portion of the stockholders, and for the benefit and advantage of the others. The statute ought not to be construed to work other than exact and even justice to all the share-owners. In Bank v. Bruce it was held that whether a purchase by a corporation of its own stock operates to diminish the capital stock, is a question of intention; and this may be inferred from circumstances. In this case, as I understand the position of the defendants, it is not claimed that the stock purchased by the corporation of Liscomb has been extinguished, but is held to be reissued whenever a purchaser for it can be obtained. However this may be, I do not think a corporation has the power, under chapter 134, section 6, to diminish its capital stock by the purchase and extinguishment of a portion of its shares, without the consent and against the protest of any of its stockholders, when such purchase and extinguishment would operate for the relief and benefit of the stockholders from whom the stock is purchased, and will increase the liability of the remaining stockholders. Unless a course is adopted which will work exact and even justice to all the owners of stock, it must follow that so much of section 6 as authorizes a corporation to diminish its capital stock, by the purchase and extinguishment of a portion of its shares, is inoperative. Probably a vote allowing each stockholder to surrender such proportion of the shares owned by him as the amount of the proposed reduction in the capital stock bears to the whole amount of capital stock, would not be open to objection, but would be a compliance with the requirements of the statute; — but that was not the course pursued here. My conclusion then is, that the action of the company, March 17, 1869, could not operate to diminish its capital stock.

The evidence shows that Adna Storrs was present at the meeting held March 17, 1869, and therefore knew the illegal nature of the consideration of the note for $600 transferred to him by Liscomb. A decree should be entered in the circuit court, that Liscomb and Storrs be enjoined from collecting or negotiating the note for $1,000 and the note for $600; that they refund to the corporation all moneys received from the corporation, by either of them, on said notes, with interest from the time of such payments; that the company reconvey to Liscomb said one hundred shares of stock; and that the contract, by which Liscomb was released from payment of any sum or sums due from him to the company at the date of the purchase of said stock by said company, be annulled and set aside.

CUSHING, C. J., and LADD, J., concurred.

Decree accordingly.