Kampman v. Tarver

1. The first question in this case certified for our determination seems to us to resolve itself into two others: first, was the act of the corporation in attempting to increase its stock by the amount of $1,100,000 ultra vires? and second, if ultra vires, were the subscriptions to such increased stock void even as to the creditors of the corporation?

Whether the attempted increase was ultra vires or not depends upon the construction of the general law in reference to private corporations contained in title 20 of our Revised Statutes. It is contended, upon the one side, that article 576, which authorizes corporations organized under the provisions of that title to increase their capital "in any amount not exceeding double the amount of its authorized capital by a vote of its stockholders," is an absolute limitation upon the power to increase the stock; and on the other, that notwithstanding the article cited, under the power of amendment conferred by article 571, corporations may increase their stock to any amount whatever.

Article 571 reads in part as follows:

"Any private corporation heretofore organized or incorporated, or which may hereafter be organized or incorporated for any of the purposes mentioned in this chapter, may amend or change its charter or act of incorporation by filing, authenticated in the manner required by this chapter as to an original charter of incorporation, such amendments or changes with the Secretary of State," etc.

Article 573 has an important bearing upon the determination of the question. It contains the following provision: "No amendments or changes violative of the Constitution or laws of this State or of any of the provisions of this title, shall be of any force and effect."

The following is the language of article 576:

"Any corporation may increase its capital stock to any amount not exceeding double the amount of its authorized capital, by a vote of the stockholders, in conformity with the by-laws thereof; and if a majority of the stockholders shall vote for the increase of stock the same may be increased by the board of directors, trustees, or other business managers of such corporation; and upon such increase of stock being made in accordance with the by-laws, the date and amount shall be certified to the Secretary of State by the directors or trustees, and from the time such certificate is filed the increase in stock shall become a part of the capital thereof. Such certificate shall be filed and recorded in the same manner as the charter."

The history of this particular legislation throws light upon the construction of these articles. This first general act on the subject of private corporations was passed in 1871. Laws 1871, p. 66. The fact that this act contained no enacting clause probably led to its re-enactment in precisely the same language, with a few changes, by the Legislature which met in 1874. Laws 1874, p. 122. In the Act of 1871 there was no provision for the amendment of the charter; but in that of 1874 substantially the same provisions as are now found in articles 571 and 573 of the Revised Statutes were incorporated as an amendment to section 10 of the original act. Section 12 of the first act authorized corporations chartered under its provisions to increase their capital stock to an amount not exceeding double the amount of their original capital, and this section was retained with the same number in the second act. That section now constitutes article 576 of the Revised Statutes, which has been hereinbefore quoted.

By the well settled rule of construction, articles 571 and 576, if consistent with each other, must both be given effect. The intent of the Legislature which passed the Act of April 23, 1874, that both should stand, is made manifest by the fact that when they inserted the new provision which confers upon corporations the power of amending their charters they retained the section in regard to the increase of the capital stock. The incorporation of both provisions in the Revised Statutes also evinces the same intention. We must hold, therefore, that the special provision in regard to the increase of stock was retained in the law in order to subserve some purpose. If it was intended by article 571 to empower a corporation to increase its capital stock to an unlimited amount, why provide by article 576 a method by which such stock could be increased within a certain limit? If to this it be answered, that the purpose was to provide a simpler mode of increasing the stock than by amendment of the charter, the reply is, that of the two modes, that by amendment is less onerous. Article 571 does not expressly declare that a vote of the stockholders should be necessary in order to amend the charter; and if such vote should be held requisite for that purpose, still it would not be more difficult to increase the stock by amendment under that article than in the manner prescribed in article 576. It is, as we think, clear, therefore, that if article 571 be construed to confer the power in question, such construction, if it did not practically supersede the subsequent provision, would at all events render it nugatory. We are not at liberty to presume that the Legislature contemplated such a result. We apprehend, therefore, that the provision contained in article 576 was retained in the statute for a definite object, and that such object was to place limitations upon the increase of the capital stock of corporations organized under the general law, both as to the amount of the increase and as to the manner in which such increase should be effected. Moreover, the prohibition contained in article 573 resolves any doubt that might otherwise exist as to the determination of this question. The provision, that "no amendment or changes violative of * * * the provisions of this title shall be of any force or effect," clearly shows that it was intended that any amendment in reference to the amount of the capital stock of a corporation should be subordinate to the limitations contained in article 576. The object of the restriction quoted from article 573 was, in our opinion, to remove any difficulty that might arise by reason of an apparent conflict between the sweeping provisions of article 571 and the limitations contained in the other articles of title 20. We conclude that the attempted increase of stock in question was not authorized by law.

We are also of opinion, that since the increase was ultra vires, a subscriber to such unauthorized stock can not be required to pay assessments upon the stock so subscribed for, even at the suit of a receiver. It was so held in Scovill v. Thayer, 105 United States, 143, in a case in which the precise question was presented. The general incorporation laws of Kansas provide, among other things, that "any incorporation may increase its capital stock to any amount not exceeding double the amount of their authorized capital." This is substantially the same language employed in article 576. In the case cited it was held, that an attempted increase of capital beyond the limit prescribed, by a corporation organized under the laws of that State, was ultra vires and void; and that a subscriber to such increase of stock incurred no liability by reason of his subscription. The court held, that since the stock was void it could confer no right upon the subscriber, and that therefore the contract of subscription was without consideration to support it. In Insurance Company v. Kamper, 73 Alabama, the same doctrine is announced, and the decision is placed upon the same ground. The opinions in these two cases are well considered and elaborate, and are well supported by the numerous authorities therein cited. We think they render any further discussion of the question on our part unnecessary.

2. The second question certified to us is more difficult of determination. In Scovill v. Thayer, supra, there was first an increase to the limit authorized, and then an attempted increase beyond that limit. The validity of a subscription to the unauthorized increase was the matter in controversy in that case, so that the question here presented was not involved. But the contract of appellant in the present case was to pay for a certain number of shares of stock in the corporation, which were a part of an increase to an amount not authorized by the statute. Having been sued upon his subscription, he pleads the illegality of the transaction as a defense to the action. We have seen that his defense, in part at least, is good, upon the ground that the shares to the extent of the unauthorized increase are void, and therefore do not constitute a consideration for the contract. Can we say, that the shares to the extent to which the corporation was empowered to increase its capital are valid, and that he should be held liable to the amount of the subscription for such shares — that is to say, for one-eleventh of his subscription? It seems to us that such a ruling would make a contract for the parties which they have not made for themselves. The appellant subscribed and agreed to pay for 700 shares of the new stock, and not for 63 7/11 shares. Suppose a subscriber had agreed to take one share, could he have been forced to accept and pay for one-eleventh of a share? If the corporation had lawfully provided for an increased issue of shares to the amount of $100,000, and had at the same time directed an additional issue to the amount of $1,000,000, and if appellant had subscribed for both, it may be that he would be bound to pay for the valid shares. But in this case the good and the bad are blended, and we know of no rule by which they are to be separated. In Merrill v. Gamble, 46 Iowa 615, the defendant, having been sued on a note, pleaded that it was given for stock in a railroad corporation to be issued to him upon the payment of the debt; that at the time the note was executed the authorized capital of the company was $500,000, which might be increased to $1,000,000 by a vote of the stockholders; that subsequently the stock was illegally increased to the amount of $2,195,000, and the stock issued; and that the legal shares could not be distinguished from the illegal. The court held, that because the shares were not distinguishable the defense was good. See also Merrill v. Reaves, 50 Iowa 404. We conclude, that the whole issue for increase in stock in this case should be held invalid.

3. We are also of the opinion that the third question certified for our determination should be answered in the negative. The practical effect of holding that a contract of subscription to an illegal issue of stock would be binding as between the corporation and its stockholders, would be to enable a corporation to override the policy of the law and to increase its stock at will. The creditors have the right to look to the stock subscriptions as a fund for the payment of their debts. When the corporation has the power to increase its stock, cases may exist in which subscribers to an increase of stock may so act as to estop themselves from denying, as to creditors, the validity of such increase. This occurs when the power exists, but has been exercised in a manner not authorized by law. We are not aware that it has ever been held that persons dealing with a corporation are bound to take notice of the manner in which it has attempted to exercise its powers. But it is well settled that they must take notice of its powers. Fitzhugh v. Franco-Texan Land Co., 81 Tex. 306, and cases there cited; Scovill v. Thayer, supra; Zabriskie v. Railway, 23 How., 381. The act of subscribing to additional shares of stock in a corporation which are not authorized by law may be equivalent to an assertion that the proposed issue is legal. But since a creditor is affected with notice of the powers of the corporation, how can it be said that he has been by such action misled to his prejudice? In Scovill v. Thayer, supra, Mr. Justice Woods, who delivered the opinion of the court, says: "The laws secured to the creditors and the public an infallible mode of ascertaining the real capital of the company. They were bound to know the law permitted no such increase of the capital stock as the company had attempted to make, and that any representation that it had been made was false." It is accordingly held in that case, that the holders of stock issued ultra vires "are not estopped to set up its invalidity as a defense to an action in the interest of creditors, brought against them to recover the balance unpaid thereon, by the fact that they attended the meeting by which it was voted to issue the same, or that they received and held certificates therefor, or that its agents and officers represented its capital to be equal to the amount of both its authorized and unauthorized stock." (We quote from the headnote by the justice who delivered the opinion.) If the rule announced and acted upon in that case be the law, as we think it is, it follows, that the conduct of appellant in this case did not estop him to deny the invalidity of the increase of stock. Indeed, we fail to see how his participation in the proceedings of the stockholders' meeting at which the debts were created is to be deemed a representation as to the validity of the new issue of stock. Being a holder of 100 of the original shares of the stock of the corporation, his participation as a shareholder was not inconsistent with the theory that the new shares were void.

Delivered February 7, 1895.

DENMAN, Associate Justice, did not sit in this case.