*1 SYSTEMATICS, v. INC MITCHELL B. Dоn 491 S.W. 5-6157 Opinion January delivered [Rehearing denied March 1973.] Smith, Williams, Friday, Clark, ér Eldredge by: T. Jerry Light and Mathis, Lewis H. for appellant.
Niblock ir Hipp, appellee. George Smith, Rose On 30, 1969, Justice. June appellant, Inc., Systematics, a comparatively young com- pany sued supplying services based data is- processing, 15,000 appellee, employee, an of Sys- stock at а of ten cents a share. The temati.cs stock was issued pursuant to a restrictive agreement by Mitchell was to offer to resell the required stock to Sys- tematics, at the same if he price, were discharged for cause. eleven months later
About Systematics discharged cause, Mitchell for but he to resell the stock to the refused company agreed рrice. Systematics brought suit for specific of the contract. The performance chancel- price of ten cents a share found lor controlling price” the terms of the statute. within “a *2 Instead, of found the fair market value the chancellor fifty appeal cents a This is from stock to be share. giving Systematics option repurchasing of decree a fifty one issue a of cents a share. The the stock at argued Mit- validity the restriction here is the persons. right to his stock to third chell’s sell language and the exact of both the contract contract, which was must be considered. The statute executed contained the employees, by company with a dozen of its following provisions: right to trans- A Stockholder shаll have ”2. assign, pledge, dispose fer, of the shares encumber otherwise
subject hereto. (10%) percent 30, 1970, ten of the "3. On June subject originally by stock holder shall be relieved of hereto owned each Stock-
and released from imposed restrictions herein. A number of like shares shall be relieved of restric- and released from the imposed succeeding tiоns herein on 30 of each June year 30, 1977, until at which time all of the June remaining stock shall be relieved of released from such restrictions.
“4. In the event the termination of a Stockholder’s employment Corporation, except by with the reason physical disability, of death or mental or then the Stockholder offer of his then shall all stock subject Corporation hereto for sale to the per Corporation exercise share. shall $.10 purchase price purchase by paying its to such Stockholder days thirty (30) in within cash not exercised offer. If such is after such Corporation, then the stock shall Stockholder’s provisions remain hereof. These to all the terms and apply when a shall not employment action Stoсkholder’s terminated Corporation without event cause [in the stock is released from the restrictions].” Systematics argues, despite effect, statu- in tory price,” parties free to were reference to “a fair
agree upon any price light fair in the regard whole, á to the market without value of the time of com- the stock at the exercise argument repurchase. pany’s option support To jurisdictions cites from other cases sustain- ing ceded, however, validity agreements such as this one. It is con- all the cases cited were decided pertinent to, of, without reference and in the absence statutes. part comprehensive our
The relevant statute adopted Corporation Act, Businеss and reads as follows: corporation may provide, any
"A issued, *3 its shares which are to be the future (whether by vivos, transfer inter inheritance or testa- other mentary gift), hypothecation disposition or of (including such shares shall to restrictions purchase options) unreasonably that do not restrain things, among restrictions, alienation —which other may require prior offering сorporation the or price, shareholders, to one or more of its at a fair may before the shares be otherwise transferred hypothecated.” (Repl. 1966). Ark. Stat. Ann. § 64-211 appended is to this section Committee Note legislative especially enlightening the with intent: draftmanship. Lawyers are is
“The above creating prepare by-law provisions often аsked might restrictions; these and it seems that there statutory authority as well be some section therefor. This permits on do not such restrictions transfer as ‘unreasonably restrain alienation.’ This leaves con- interpretation; siderable room for but the commit- attempt spell tee did not out in detail want unreasonably what alie- restrictions would restrain Cyclopedia Flеtcher, nation. As to such restrictions see Corporations, Edition, Permanent Section 5456. Page 5457, 12, 309; Vol. 5458.” also Sections note, read The statute and the committee’s when together, it act make clear that the the draftsmen
851 First, points restrictions in mind: such had at least two unreasonably re- stock must transfer of the unreasonable restraint That such an strain alienation. be invаlid Cylopedia, 5456, and § in Fletcher’s is stated Drug Co., 767, City S.W. 2d 27 in Ward v. Secondly, by the (1962), committee. cited the also repurchase price provide must a fair striction point discussed Fletcher That the stock. price “The determination cited the committee: is one of paid transfer restricted to be questions. . The methods most . . the most troublesome (1) of restricted shares are: often used flat multiple the valuation expressed (2) (3) price; value; as a a formula book earnings; (4) par average net value shares.” obviously reject the “flat decided to committee price-fixing, price” “par be- value” methods price” approved selected cause “a standard. discussing proposed Moreover, in a law review аrticle corporation enactment, the author had code before say, him: at had been before if the bar almost as case case, Tis- leading Biltmore Allen v. New York “A (1957), Corp., 141 N.E.
sue N.Y. 2d is valid even first restriction held that a paid by though exer- to be selling cising fixed *4 originally paid his exact [the for shareholder Query before whether fact situation now us]. price’ meаning the be the would ‘a fair within appreciated if marked- the shares have Arkansas statute ly that first in value. In order be certain price not declared invalid because the are unfair, which the shares are to be is at transferred provision may adjusting have to for some be made change price the from time to time as the shares Corporation O’Neal, thе value.” in Proposed Small Corporation Code, L. Arkansas 17 (1963). Rev. by study of that are our the statute We convinced unreasonably agreed upon (a) must not the restriction agreed (b) price stock, of the the
restrain alienation repurchase, time the for the must be fair explicitly future of the statute refers “the transfer” price that was fair when the was stock. Hence contract may years necessarily not be fair some later. executed opinion before our the restrictive now requirements of us runs counter to both the statute. unreasonably First, That is: the restriction restrains alien- argue Counsel for ation.. was required repurchase he Mitchell’s stock when discharged, but we do not so read the Para- contract. graрh governing repurchase, the matter vests the repurchase repurchase corpo- decision to or not to in the language: ration, with this added “If such is not Corporation, exercised then the Stockholder’s pro- stock shall remain to all the terms and interpretation visions see hereof.” no We reasonable language except to take it tо if mean that the com- pany repurchase not decides the stock at ten cents a share, any- still stockholder cannot sell the stock to ultimately expire one else until the restrictions under Paragraph agreement. Thus the stockholder compelled years Syste- be matics to retain an investment in though discharged he even has been and has no company. only desire to be with connected We can regard such a restriction as an unreasonable restraint alienability of the stock. Secondly, price respect is not fair with to future stock, talking sales of which is what the statute is about. The chancellor found the fair value of the stock fifty finding at the time of be trial to cents a share. That questioned Systematiсs, is not which elected not to (its posi- abstract with to market value being here). tion that that issue involved It is plain enough price that a resale of the market 20% value of the stock is a fair and for that reason alienability property. tends to restrain the Thus requirement statute, the second fair, wanting the contract under also considera- *5 tion. affirming imply
In the decree we do not the right fixing chancellor in the fair market Systematics may repurchase which the As we stock. Rector-Phillips-Morse Vroman, pointed v. in out (1973), province the it is the S.W. parties. to the The courts make contracts for decree gone have no should farther than to declare the con- option leaving parties invalid, tractual to be their cross-apрealed Mitchell, however, own devices. has not accordingly from decree and bound to its abide if elects to exercise recognized by the chancellor’s decree.
Affirmed. and C. J., J., dissent.
Harris, Fogleman, dissenting. respect- A. I Justice, must Fogleman, John agree fully the statute dissent I do not because jected of shares four means valuation either of the repurchase. of inter- The wide latitude on an question pretation the restraint whether relates to question unreasonable, on alienation ascertainment price price price.” “fair Par value or flat of a may, circumstances, appropriate a fairer be under corporation parties closely than book held all in a earnings. multiple average a net value purchaser corporation paid price fairer all either the four other concerned than par methods In this case this was valuation. company value, because the was new no other value and been had established. agreement employees entering into afforded opportunity profits contracts the in the
these share company, successful, of the rights if it was to have certain and ownership give in could them a voice permitted management. This the free alienation every year un- was no and thus 10% of this stock duly in if the market value turned out to be restrictive price. purchase excess Cyclopedia 12, Fletcher, text of revised Vol. replaced Corporations, Ed., have Perm. 5461.8 seems to majority points quoted opinion the section why closely up stockholder should the reason held agreeing great have freedom
853-A The first the method valuation. of that paragraph section reads: determination the price to be on the paid
transfer of restricted shares one of the most trouble- course, questions. sоme difficulty, of arises from the fact that the shares of a close corporation are not traded the market and hence their fair market value cannot be readily ascertained. But con- such tracts these under consideration usually provide a method for at the arriving value of the stock. In order to induce desired individuals into investing their capital held closely corporations with stock restrictions often imposed, must be attractive as well as the prospects future While earnings. a desirable, precise method evaluating the stock might
restrictive agreements often allow a lot of leeway. I am authorized to state that the Chief joins Justice
in this dissent. Opinion
Supplemental Denial of Rehearing delivered
March Corporations 1. alienation of stock —statu- —rеstrictions tory provisions. providing —In the statute for restrictions stock, permitted do not unreason- alienation restrictions are alienation, ably requirement restrain of a fair merely permissible incident an restrictions. proof Appeal for —review.—Remand error —remand further & 2. granted in view of the taking not be for the could Supreme policy since against piece-meal Court’s trial cases appellant had developed purpose the issue of restrictive best. thought to the it extent Court; from Thomas Washington
Appeal Chancery Butt, Chancellor; F. affirmed.
Smith, Williams, Clark, Jerry Friday, Eldredge & by: Light Mathis, T. H. Lewis for appellant.
853-B Hipp, appellee.
Niblock ér *7 rehearing. Systema- Justice, George Smith, Rose rehearing, argues petition tics, opinion solely that we based our in a for contrac- of the the unreasonableness this that It then contended on alienation. tual restraint involves really question in issue fact which was a Upon reasoning parties. asked we are between proof. taking of additional to the case for the remand convincing. argument its find We do any hardly Systematics abstract elected to brief testimony 548-page record in the contained price argue as matter of law that the a contract almost value. though market it had no relation fair even was fair impossible, however, the issue to consider It is considering the argued, price, without also was are upon alienation, the two because of restraint matter together to constitute inseparably statute as tied so a Omitting words, is the here single irrelevant issue. language statute: any corporation provide,
“A issued, are be the future its shares which . of be to restric- transfer. . such shares shall purchase options) (including un- tions do not reasonably restrictions, restrain alienation —which things, may require prior offering among other a corporation. price.” . . fair Ann. at a Ark. Stat. 1966). (Repl. § 64-211 apparent price
It is at once that the matter aof fair actually cаnnot does is to in a considered vacuum. What the statute permit unreasonably restrictions that do not price restrain alienation. The matter of a fair is mentioned explaining possible permis- in a subordinate clause sible But the restrictions. thrust the statute is directed against alienability, unreasonable restraints on quirement being merely of a fair an incident legislative thе dominant intention.
853-C put on notice from the outset that was involved. Mitchell’s statute counterclaim contained option agreement void this assertion: “That said first prior 64-211, in that under Ark. Stat. Anno. Section offering made to the a stockholder must be [or] price’ a .” indicated, 'at . . As we have the fairness upon alienability; of the cannot be involves effect two
sepаrated. Consequently, question of a part inherently restraint alienation was so dispute very beginning from the that it have would not possible controversy been us to for decide the without taking it into account. petition rehearing
In connection with the we granted attorneys sup- a motion to allow several to file a *8 porting brief as amici curiae. That brief raises two issues really might opinion involved, that are not but since the upon otherwise misunderstood we think it best touch to those issues. point
First, A B counsel out that Subsections and (§ 64-211) the statute have to do con- with restraints that are by- incorporation tained in either in the articles It laws. is then asserted that since the in restraints the case authorized, bar were not so our decision threatens the validity enforceability agreements many un- made der Subsection C statute. enough say argument
It to that this is based unfamiliarity beginning counsel’s with the record. At the pleaded of the case Mitchell the statute and inter- directed rogatories Systematics, asking to whether had incorporation in been made the articles of for the restric- outstanding tions on the transfer stock. Systematics answered that the restrictions were contained by-laws approved (Record, pp. 23-24.) in 1967. June opinion only Hence our related A B Subsections statute, with no reference to Subsection C.
Secondly, Systematics’ the amici curiae brief echoes insistence that the bility issue of factual restraints aliena- fully developed. has not been In that сonnection say: totally counsel “The Record silent with 853-D Depending upon for this transaction. motive
Appellant’s well be motive, could these restrictions Appellant’s under Stats. 64-211C.” ‘reasonable’ as § garded involved, is not the fact that 64-211C from Apart unfamiliar- also indicates counsel’s argument this second silent,” the being “totally Far from the record. ity with much for the contains about background record well ex- itself pretty The terms contract. Gattis, execu- Mr. one of Systematics’ its purpose. plain tives, used contract company testified that “our intentions key show employees “motivator” Smiley, them a sincere of our Mr. part company.” make testimony, another witness for similar Systematics, gave allowed the company compensate stating plan a fair manner and it was made available executives to “the fourteen also volunteered key people.” Smiley available, was longer the information that no plan ruling under an it become IRS having illegal July, with reference to capital gains. not brief elected to abstract does testimony, obviously but that omission foregoing it to not developed. entitle the issue was argue it but also
opportunity develop presented was best. availed to the extent that Systematics thought Our against trial of cases rebuts policy piece-meal that another for the suggestion taking opportunity *9 should be afforded. petition rehearing denied. Fogleman, dissents. J., Fogleman, I respectfully Justice, dissenting. A. John in my for the reason stated
dissent dissent, do believe that fact but I because by by- here authorized involved type restriction operation prevents laws of the corporation starts subsection 1966). That Ann. (Repl. Stat. 64-211C is intended “Nothing in this section the words off with of a any or all shares the holder or holders prevent corporation from shares, subjecting their their own * * agreement, personal contract or to restrictions *.” in this "Nothing The words section” obviously refer to B, subsections A and and the appellee definitely subjected his shares to the restrictions by his personal contract. position
I adhere to the taken on the original dis- position this case regardless of the matters set out the supplemental opinion. Martin CONNOR v. STATE Arkansas
John 490 S.W.
Opinion delivered January
[Rehearing denied March 1973.]