Citation Numbers: 99 A.D. 377, 91 N.Y.S. 239
Judges: Brien, Laughlin
Filed Date: 7/1/1904
Status: Precedential
Modified Date: 1/13/2023
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 only extend this opinion to quote from these at length nor is it necessary, because every text writer who has dealt with the subject, as well as all the cases in' the different States that have either directly or remotely touched upon it, are cited, collated and ably discussed in the briefs of counsel. We may, however, profitably refer to Cook on Corporations (5th ed. § 286), which embraces in substance what is stated by other text writers, it being said: “ 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 a 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
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 on 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 vwes, 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) 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
The first of these cases (Miller v. Illinois Central R. 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 300 shares of the stock to he 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 Schuylers 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
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 old stockholders had a right to shares in the issuing of this new stock in proportion to the amount of 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 transferring 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 Folg-er 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. 800, and notes, Sumner ed.)”
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
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 subscribe 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 greater than its par value and it is proposed to issue it at its greater price, to subscribe for it at such price, in preference to outsiders, is quite different and distinct from the right here claimed, which is that of a stockholder to have at par stock which is worth or can be sold, in the interest and for the benefit of the corporation, to others for four and a half times its par value. We do not think, in the absence of any statute of the State conferring such right, or provi
It is not claimed that there is any statute in this State which confers such right, nor are any of the other conditions to which we have adverted present which in any way affects the exact question which we are discussing, namely, whether or not the officers, directors and a majority of the stockholders of a corporation, when acting in good faith and in the interest and for the benefit of the corporation and the stockholders, can increase its capital stock and sell it to outsiders for a sum greatly in excess of its par value without giving to a dissenting minority stockholder the privilege of obtaining his proportion thereof at par.
The status as well as the rights of the stockholder with respect to the issue of new or increased stock has been set forth with clearness and in a manner that commends the reasoning to our judgment in the opinion of Mr. Justice Peabody in the case to which we have already adverted of Miller v. Illinois Central R. R. Co. (supra) in the following language : “ The ownership of stock of the company gave to the owner an undivided interest as owner in the 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. Prima 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.”
In nearly all the cases relied upon by the plaintiff a court of equity was appealed to to prevent unjust and unconscionable benefits to officers or fellow-stoclcholders at the expense of another stockholder. If, however, upon the facts here appearing, the plaintiff can succeed, a court of equity will be assisting in consummating a transaction which will enable a single stockholder to retain all benefits in common with his fellow-stockholders, and, in addition, obtain the other benefits included in the large money judgment here awarded at their expense. The benefit which has resulted from the sale of the new stock to Blair & Co. has increased the market value of the plaintiff’s shares of stock from $400 to $700, and has intrinsically increased it in the difference between the former and the present book value of the stock. These benefits or advantages were equally shared by every other stockholder. What, however, the plaintiff in addition claims is the difference between par and $550, the market value of the stock on the day of issue to Blair & Co., which advantage will accrue to no other stockholder but the plaintiff, and which he is to receive at their expense, because, if the judgment is paid by the company, the loss will necessarily fall on the stockholders. Such an inequitable result, which would give the plaintiff an unfair advantage over the other stockholders, should not be permitted, unless for cogent reasons or because of some rule of law which makes such a result inevitable.
Recognizing the force of this suggestion, the plaintiff meets it by saying that this contention of lack of equity or justice begs the whole question, because, having, as he claims, an absolute, inherent, vested property right, under the view taken by text winters and sustained by expressions in opinions, there cannot result any inequity
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
It is to be noted that the proposition of Blair & 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 Sterrett in Morris v. Stevens (178 Penn. St. 563), 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 stockholders 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 officers had made to deliver all of the increased stock to Blair & Co.
In one aspect, reading the notice of the meeting which stated its objects, together with the circular letter explaining the purpose of
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 & Co. to subscribe for his proportionate share of
This judgment, we think, should be reversed and a new trial ordered, with costs to the appellant to abide the event.
Van Brunt, P. J., and Hatch, J., concurred; Patterson, J., concurred in result.