17 Del. Ch. 1 | New York Court of Chancery | 1929
The complainant’s case rests on the proposition that the ninth article of the certificate of incorporation is not legally binding on stockholders of the defendant corporation and that therefore he is entitled to a transfer of the stock to himself notwithstanding that the conditions and restrictions set forth in that article have never been complied with.
“To sum up the complainant’s position: First, as a general proposition, the law views with disfavor restraints on alienation; the provision excising good will, one of its most valuable assets, from stock, is, in substance, a most effective restraint. Second, such a provision must have direct statutory authority and must not be inferred ‘from ambiguous expressions’ in the law; there is no such statutory authority in the General Corporation Law of Delaware. Third, the provisions in question are unreasonable and arbitrary and have no connection with the end which is advanced to justify them. Lastly, the provisions of the charter are an attempt to insert into corporate structure the characteristics of a partnership.”
I shall consider the points thus made in the order of their statement. First, then, to the general proposition that the law-views with disfavor restraints on alienation, the defendant interposes no objection. As a general proposition, there can indeed be none. But that the law will in no case admit of any sort of restraint upon alienations is not of course true. Examples need not be enumerated of where restraints reasonable in their nature are regarded by the law as permissible.
In this case the particular question is whether the restraint imposed upon the alienation of stock of a corporation under such charter provisions as we find here and under such circumstances as the answer shows this corporation’s business to be enveloped in, can be said to offend against the law.
It is to be noted that the charter does not assume to take away absolutely the right of a stockholder to alien his stock. A way is provided for him to sell his stock and take out of the corporation his investment therein. The only restraint imposed is that a particular person, viz., the corporation, shall first have the opportunity to buy the stock, and next that the price, if not mutually agreed upon, shall be determined by an appraisement made in a designated manner. '
There is thus no attempt made to inhibit the stockholder from ever disposing of his stock. There is an attempt made to compel the stockholder to deal first with only one of the possible purchasers — the corporation itself. If that purchaser refuses the stock, then it is liberated from all restraint. The answer, which must be taken as true in all of its averments on a motion for
Second. The next contention advanced by the complainant is that the provisions of the ninth article of the charter must have direct statutory authority for its adoption by the corporation, must not be inferred from ambiguous expressions in the law, and that there is no direct statutory authority in the act under which the defendant was created for the adoption by it of such provisions as this as a part of its charter power. The defendant answers this contention by pointing to certain provisions of the Delaware act as conferring corporate power to adopt the article in question. These provisions are that the corporation has power conferred upon it to make by-laws inter alia “for the certification and transfer of its stock;” that “the shares of stock shall be * * * transfer
The defendant argues that the provisions of the ninth article are but a species of rules and regulations governing the transfer of its stock and that being such the corporation has statutory authority to adopt them even by by-law enactment, and a fortiori by charter reservation. McDowell v. Bank of Wilmington & Brandywine, 1 Har. 27; and Nicholson v. Franklin Brewing Co., 82 Ohio St. 94, 91 N. E. 991, 37 Am. St. Rep. 764, 19 Ann. Cas. 699, are cited by the defendant as authority to support the proposition that from statutory authority to regulate transfers of stock, may be deduced a power to impose upon the right of transfer such conditions as the article here under debate undertakes to impose.
Whether there be merit in this argument, I find it unnecessary for me to say, for the reason that there is another consideration which in my judgment is so clearly determinative of the question of power that the argument just mentioned need not be further considered. That consideration is as follows :
The statute under which the defendant was incorporated gives power to all corporations created under it to purchase, hold, sell and transfer shares of their own capital stock. Section 19 (Rev. Code 1915, § 1933). The defendant in its certificate of incorporation took this power, phrasing it in the words of the statute.
This corporation clearly therefore had and has power to purchase its own stock. The making of contracts to purchase is an indispensable adjunct to an exercise of the power to acquire. The provisions of the ninth article of the charter are nothing more nor less than the definition of the terms of a contract by which each person who becomes a stockholder binds himself to afford to the corporation an opportunity to purchase his stock in the exercise of an expressly delegated power. When the matter is examined in this light, it thus becomes unnecessary to resort to what the complainant calls “ambiguous expressions” in the
Third. The next contention relied upon by the complainant is that the provisions are unreasonable and arbitrary and have no connection with the end which is advanced to justify them. One of the points appropriate for consideration under this head is that the price at which the stockholder must sell his stock is a price which contains no allowance for the value of the asset item of good will. I can see no objection to this. It is merely a matter of contract, and certainly parties are at liberty to stipulate upon the contract’s terms. Of course if the terms are unconscionable, no court of equity would assist in enforcing them. But there is nothing inequitable in these terms, especially when it is remembered that when the complainant’s transferror bought the stock, the price paid by her took no account of the good will. She paid the book value with the item of good will eliminated. How can it be said to be unreasonable or arbitrary to require her, in case she sells, to forego any profit on that which she in substance never bought? But aside from that, she knew the basis of estimating the price which she was to receive in case of sale and it was entirely competent for her to agree to become a stockholder on that basis. If she did not like the terms of the contract that defined her relationship, she need not have accepted them. The choice was' a voluntary one made with full knowledge and free from anything like fraud or deceit.
It is further said that it is unreasonable and arbitrary to allow the appraisers to be drawn only from the body of interested stockholders. If the motive of self interest is calculated to prompt the appraisers to fix a price unfair to the selling stockholder, the stockholder should have given due weight to that consideration before deciding to assume the relationship. Having voluntarily agreed to abide by the judgment of appraisers selected in the manner specified, it is difficult to see how the stockholder can repudiate the agreement. Of course if fraud were present in the appraisers’ conduct, the stockholder might have a just cause for relief. But there is no question of fraud raised in this case.
Lastly, it is argued that the provisions of the ninth article constitute an attempt to insert into a corporate structure the characteristics of a partnership. In answer to this, I ask, what of it if there is such an attempt? In so far as that attempt is impossible of accomplishment by reason of the inherent legal qualities of a corporation on the one hand and a partnership on the other, it will of course prove abortive. An outstanding characteristic of a partnership in so far as its economic advantages are concerned is that its constituency is animated by a deep personal interest in its successful operation, and efficiency in its conduct is thereby calculated to be sécured. That the plan adopted by this corporation to keep stock ownership among its employees is designed to reap the benefit of this sort of advantage
I may say further that the complainant’s contention that the scheme of the ninth article is an attempt to insert into the corporate structure the characteristics of a partnership, contains in itself a refutation of the complainant’s third point, viz., that the scheme has no connection with the end which is advanced to justify it.
Motion denied. Let an order be prepared accordingly.
Note. — Upon the filing of the foregoing opinion the complainant elected to take a final decree dismissing the bill, from which an appeal was taken to the Supreme Court and the Chancellor’s decree affirmed. See post p. 343, 152 A. 723.