Case ID: ohio-cir-dec_12/html/0170-01.html
Source: Caselaw Access Project
Author: {"author": "Voorhees, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

CORPORATIONS — CONDITIONAL SUBSCRIPTIONS.
    [Licking Circuit Court,
    March Term, 1901.]
    Douglass, C. J., Voorhees and Donahue, JJ.
    George C. Stunt v. Newark Weldless Tube & Steel Co.
    1. Conditional Subscription to Stock, when not Condition-Precedent.
    In a contract between a subscriber and a corporation for shares of the capital stock in the company, which provides that the subscriber shall be given a position in the company that will pay him two dollars a day or better, and on failure to comply therewith, the subscription to be null and void, such stipulation for employment contemplates that the subscriber will become a stockholder before he will be employed, and that compliance by the corporation with the condition is not to be regarded as a condition precedent to his becoming a member of the corporation. Such a provision or condition for employment is an independent stipulation, for the breach of which the remedy would.be in damages, and not to recover back the subscription paid.
    
      2. Such a Stipulation is a Condition Subsequent.
    A stipulation in a contract with a subscriber to the capital stock of a corporation which provides that the subscriber shall receive, in addition to his stock shares, a position in the company as employee, and will pay him a fixed sum per day, is a condition subsequent, and the non-performance of the condition will not work a dissolution of the relation of the subscriber to the company as a stockholder in the corporation.
    8. Such a Stipulation Combines Two Contracts.
    A subscription to the stock of the corporation on such a condition for employ ment is an agreement combiniug two contracts; one the contract of subscription ; the other an ordinary contract of the corporation to perform the specified act of giving the employment. The subscription is valid and enforceable, whether the condition as to employment is performed or not. The condition is the same as a separate collateral contract between the corporation and the subscriber, for breach of which an action for damages is the remedy.
    4. Conditional Subscriptions Against Public Policy, When.
    A contract with a subscriber to the capital stock of a corporation which attempts to secure advantages and privileges not common to all other stockholders or subscribers, and without their knowledge and consent, is contrary to public policy, and can have no effect to limit in any way his contract of subscription, and in’so far as it attempts to do so will be treated as a fraud upon other stockholders not consenting thereto.
    Heard on Error.
    
      Kibler & Kibler and Smythe & Smythe, for plaintiff.
    /. M. Swartz, for defendant.
   Voorhees, J.

The plaintiffs cause of action is founded upon a contract, and he seeks to recover from the defendant, a corporation, the amount paid by him as subscription to the capital stock ol the company. The petition avers in substance, that the plaintiff agieed to buy fifty shares of the stock of the company at lorty d fflars per share, aggregating the sum of two thousand dollars, which was paid in full. That by the contract, the defendant agreed, as a part of the consideration for the purchase of the stock, that it (the corporation) would give him a position in said company that would pay him cwo dollars per day or better, and to be advanced as his abilities would warrant, and if said company failed to comply with said condition the said subscription should be nuil and void. That after the company was organized he demanded of the company employment under said contract, which was refused ; and by reason of the company’s violation of the contract, this action is brought to recover the subscription paid by the plaintiff for the stock of the company so purchased.

To the petition a general demurrer was interposed which raises the question whether or not such a contract is legal and can be enforce?., giving the plaintiff the remedy sought to be enforced in this action. The common pleas court sustained the demurrer and dismissed the petition, and the case is in this court on petition in error.

The contention of the plaintiff is, ihat the promise of the company to give him employment was a condition precedent, and by its failure to comply with the condition of the contract, which by its terms was to become null and void, a cause of action to recover back from the company his subscription accrued to him.

The controversy concerns the validity of such an agreement between a subscriber and the corporation. There are undoubtedly a class of cases where subscriptions to initiatory stock upon special terms, not prohibited by the chartér, and not in contravention of any clearly defined public policy, have been held valid as between the subscribers and the corporation.

The corporation having refused to execute or comply with this agreement to furnish employment to the plaintiff, does it give him the right against the corporation to recover back his stock subscription?

This raises the question whether his subscription is to be regarded as one upon a condition precedent or subsequent. Plaintiff does not aver that he subscribed upon condition that before he should be required to pay for the shares he was to secure employment. On the contrary he alleges: “ That on or about the 17th day of February, 1897, the defendant and the plaintiff entered into a written contract duly delivered, by which the plaintiff agreed to purchase fifty (50) shares of the capital stock of said company, at the agreed and authorized price of forty dollars for each share of fifty dollars, amounting to the sum of two thousand dollars, payable in installments, viz: within ten day's after receiving notice from said company that 1,500 shares of 2,250 shares of said capital stock had been subscribed for, 25 per cent, of said subscription, 30 day's thereafter 10 per cent, more of said sum of two thousand dollars, in 30 days more 15 per cent, more thereof, in 30 days more 20 per cenc. additional and at the end of 30 days more, or whenever called for thereafter, 30 per cent, of the balance of said subscription.” * * * That afterwards and before the company had fully constructed or finished its plant and was ready to commence to manufacture its tubes, etc., to-wit: on and by the 5th day of October, 1897, the plaintiff paid said company and said company received the full amount of two thousand dollars.

He clearly contemplated that his subscription should be paid before any position or employment was or could be secured to him in the company ; for the position or employment contemplated was in the company after it became a going concern, and this could not be accomplished except upon the supposition that the capital stock, or a part at least, should be paid in and then invested in a plant to be operated by the company. When a subscription is taken distinctly upon the condition that it is not to be binding until a stipulated thing is done, then such a subscriber does not become a stockholder, and is not entitled to the rights or charged with the burdens of a stockholder, until the conditions have been complied with.

Concerning conditional subscriptions, the Supreme Court of Tennessee, in Railroad v. Parks, 2 Pickle, 560, say: “ The capital of stock

companies consists of their stock subscriptions. This is the basis of credit, and an essential to organization, 'i his is a trust fund for the benefit of creditors in case of insolvency. Conditional subscriptions to the stock of corporations ere unusual and often operate to defeat subscribers who become such absolutely and upon the faith that all of the stock is equally bound to contribute to the hazards of the enterprise. It misleads creditors, and is the fruitful source of litigation and disaster. Tending to the ensuaremeni uf creditors and contrary to a sound public policy, conditional suoscrlptious to corporate shares ought not to be encouraged.”

A condition subsequent is defined by Mr. Cook in his work on stock and stockholders : “ A subscription on a condition subsequent contains a contract between the corporation and a subscriber, whereby the corporation agrees to do some act, thereby combining two contracts; one the contract of subscription, the other an ordinary contract of the corporation to perform cert .in specified acts. The subscription is valid and enforceable, whether the conditions are performed or not. The condition subsequent is the same as a separate collateral contract between the corporation and the subscriber, for breach of which an action for damages is the remedy.” Cook on Stock and Stockholders, Sec. 78.

The principle is recognized by the Supreme Court, in Chamberlain v. Railroad Co., 15 Ohio St., 225, at page 247, the court say: “The conditions referred to may be either precedent, or subsequent. Of the former class we see no objection to the subscriber inserting such as he may choose. Until they are performed the relation of the subscriber to the company as a stockholder does not arise. But, after that relation is established, whether the non-performance of a condition subsequent would work its dissolution is a different question. It may be that all such conditions as these last named, should be viewed, as between the corporation and the subscriber, in the light of stipulations merely, and that, in case of their non-performance, he should be left for redress to the ordinary remedies for breaches of contract.”

The provision of the contract in question, as to giving the plaintiff a position or employment in the company when the company became operative, “that would pay him two dollars a day or better,” is to be regarded as a stipulation on the part of the company, which in accepting the subscription in the terms proposed, it undertook to perform. The plaintiff’s right to require its performance, though arising out of the same contract as the stock for which he subscribed, does not attach to him as a stockholder, but as a contractor. And whatever might be his rights with regard to this stipulation in a controversy between him and the compauy in an action for damages for a breach of the contract, it does not give him the right to recover back his subscription to the capital stock of the corporation.

The vital question in such case is, whether or not a corporation can secure privileges to one stockholder, who subscribes to its stock, in giving him special terms not to be enjoyed by other stockholders ?

“ Managing agents of a corporation have only a very limited authority to make special agreements varying the rights and duties of the several shareholders. This follows from the relationship between the shareholders and the character of their contract. The subscribers for shares have agreed to associate for the purpose and upon the terms expressed in their charter or articles of association. The rights of every subscriber in the management of the company and the distribution of its profits are equal to the rights of every other shareholder in respect to every share; and it is clearly contemplated by the subscribers that the burdens shall be distributed equally also. An agreement giving one subscriber greater privileges, or making his obligations lighter than those of the other subscribers, would be unfair to those members who had subscribed upon less favorable terms. Hence it is very difficult to imply any authority in the agents of a company to vary the ordinary contract of membership, in any substantial particular, by assenting to a subscription upon special terms.” Morawetz on Corp., Sec. 87.

In the contract set out in plaintiffs petition there are special terms given to him which are not given to the subscribers generally. All the subscribers to the stock are not promised employment at a fixed or any price per day, binding the company to its performance, and on failure the contract to be null and void. In Henry v. Railroad Co., 17 Ohio, 187, it is held: “An agreement attempting to secure any stockholder the privilege of paying up subscriptions in Store goods or otherwise, except in money, will be treated as a fraud upon stockholders and payment in money enforced.” In Noble, Adm’r, v. Callender, 20 Ohio St., p. 199, it was held : “ A subscriber for shares of stock in a railroad company, which is not authorized by law to receive land in payment for its stock, cannot, in an action against the stockholders of the company, by its creditors, set up or avail himself of the benefit of a collateral agreement between himself and the company, to the effect that the amount of his subscription was to be paid in land.” In Gates, Admr., v. Tippecanoe Stone Co., 57 Ohio St., 60 [48 N. E. Rep., 285; 63 A. S. Rep., 705], referring to the case in Noble, Admr., v. Callender, supra, atpage 75,say : “ In this case the contract to pay the subscription in land was contemporaneous with the subscription, and the subscription would not have been made, had it not been payable in this way, and yet it was not allowed to prevail.”

The general principle of law undoubtedly is, that contracts made between an incorporated company and its stockholders, when special privileges are given to the subscriber limiting his liability or securing him privileges which are not given to the stockholders generally, are contrary to public policy and can have no effect to limit in any way their contracts of subscription, and in so far as they attempt to do so will be treated as a fraud upon such other stockholders not consenting thereto.

It is not claimed or-averred in the petition that the other stockholders of defendant company knew or consented to the conditional contract of plaintiff, whereby he was promised employment, nor is it alleged in the petition that the plaintiff relied upon the contract as to employment in making his subscription, When material facts are not alleged in a petition, in testing the pleading upon demurrer, they are to be assumed most strongly against the pleader. Ashbrook v. Hite, 9 Ohio St., 357, 361 [75 Am. Dec.. 468]..

The principle that an agreement between one subscriber to the stock of a corporation and the company, made concurrently with the making of the subscription, which purports to annul its obligation or materially limit and change the liability of the subscriber to the detriment of the company, is invalid and void, is founded, says Mr. Beach, “ upon the doctrine that a subscription to the stock of a corporation whose stock is open for general subscription, is not only an undertaking between each subscriber and the company, but between him and all other subscribers to the common enterprise ; and that each subscriber has the right to suppose that the subscription of every other subscriber is a bona fide undertaking according to its terms. Their respective subscriptions are contributious or advances for a common object. The action of éach in his subscription may be supposed to be influenced by that of the others, and every subscription to be based on the ground that the others are what, upon their face, they purport tobe.” 2 Beach on Private Corporations, Sec. 5368.

From the allegations of plaintiff’s petition it cannot be questioned, under his contract of subscription and in paying for his stock, he intended to become a member of the corporation. And of such an act Mr. Morawetz says: “If it appears that the subscriber intended to become a member of the corporation, and as such entitled to vote at meetings and otherwise enjoy the privileges of membership, it is clear that the subscription cannot be deemed a subscription upon a condition precedent.” Morawetz on Corporations, Sec. 89.

The plaintiff’s case, as made by his petition, is clearly distinguishable from that class of cases wherein certain conditional subscriptions have been recognized and sustained, as in Ashtabula & New Lisbon R. R. Co. v. Smith, 15 Ohio St., 328, and in Armstrong v. Karshner, 47 Ohio St., 276, 294, 295 [24 N. E. Rep., 897].

The petition here does not make a case of conditional sale, nor an agreement on the part of the corporation to take back the plaintiff’s stock on failure to comply with the contract. It is not necessary therefore to decide whether a corporation can so traffic in its own stock. The contract is sought to be rendered null and void by failing to comply with a condition subsequent and not a condition precedent; and the stipulations relied upon being a condition subsequent, it does not render the whole contract void as shown by authorities supra, and especially by Cook on Slock and Stockholders, Sec. 78.

The case does not fall within the rule of Vent v. Duluth Coffee and Spice Co., 67 N. W. Rep., 70 [64 Minn., 307], Supreme Court of Minnesota. In that case the court made the suggestion that a conditional subscription may be void, invalid, and the party not be a stockholder ; but that he may have the right to recover back his money. The syllabus says : “ The plaintiff purchased from the defendant corporation a number of shares of its capital stock, by an agreement which provided that at the end of a certain time he could, at his option, return the stock, and receive back the purchase price * * *. In an action to recover such price, held the agreement is in the nature of a conditional sale, with an option to the purchaser to revoke or rescind ; and, as between the plaintiff and defendant, the rights of creditors not being involved, the agreement by the defendant to receive back the stock, and pay back the price thereof, is not ultra vires''

The court further say : ‘ ‘ There is no express provision in its articles of incorporation authorizing defendant to buy or deal in its own stock, and whether an original independent contract, by which it agreed to purchase its own stock, would be ultra vires, we need not consider. This is not such a case. This provision of the contract constituted a material and substantial part of the consideration and inducement for the purchase of the stock by plaintiff, and, if the provision is void, it seems to us that it vitiates the whole contract, and it is a sufficient reason for the rescission of that contract and the return of the purchase price, which purchase price plaintiffs are demanding. But the better opinion, it seems to us, is that which holds the original contract to be a conditional sale, with the option to revoke or rescind in the purchaser.”

The doctrine of this Minnesota case is in conflict with Coppin v. Greenlees & Ransom Co., 38 Ohio St., 275 [43 Am. Rep., 425], Judge Mcllvane, at page 278, says: “The doctrine that corporations, when not prohibited by their charters, may buy and sell their own stocks, is supported by a line of authorities; and prominent among them, may be mentioned the cases of Dupee v. Boston Water Power Co., 114 Mass., 37, and C. P. and S. R. R. Co. v. Marsailles, 84 Ill., 145. But, nevertheless, we think the decided weight of authority both in England and in the United States, is against the existence of the power unless conferred by express grant or clear implication. The foundation principle, upon which these latter cases rest, is that a corporation possesses no powers except such as are conferred upon it by its charter, either by express grant or necessary implication ; and this principle has been frequently declared by the Supreme Court of this state; and by no court more emphatically than by this court. It is true, however, that in most jurisdictions, where the right of a corporation to traffic in its own stock has been denied, an exception to the rule has been, admitted to exist, whereby a corporation has been allowed to take its own stock in satisfaction of a debt due to it. This exception is supposed to rest on a necessity which arises in order to avoid loss; and was recognized in this state as early as Taylor v. Miami Exporting Co., 6 Ohio, 176, and has been incidentally referred to as an existing right since the adoption of our present constitution. State v. Building Association, 85 Ohio St., 258.”

In the case under consideration, believing as we do, that the provision in the contract in relation to giving the plaintiff employment in the company, was a stipulation merely, and its performance was not a condition precedent to his becoming a stockholder, we hold, that on paying his subscription, the relation of stockholder was established between him and the company, whether the corporation gave him employment or •not; and upon its failing to do so, he is left for redress to the ordinary remedies for the breach of the contract.

This conclusion is supported by the well considered case of Morrow v. Nashville Iron and Steel Co., 10 Am. St. Rep., p. 658 [10 S. W. Rep., 495; 87 Tenn., 262; 3 L. R. A., 37; 10 A. S. Rep., 658]. In the syllabus the court say :

1. “A stipulation in a contract with a subscriber to the initiatory capital stock of a manufacturing corporation, organized under the general incorporation laws of the state, which provides that the subscriber shall receive, in addition to his stock shares, interest-bearing bonds to an equal amount, secured by mortgage upon the company's plant, is without consideration, and is absolutely void, both as against creditors and between the subscriber and the corporation ; and the failure of the corporation to carry out such illegal stipulation does not release the subscriber from liability upon his subscription.
2. “Stipulation in contract of subscription to organization or initiatory tock of corporation to issue bonds to the subscriber to the full amount of his subscription, secured by first mortgage on the company’s plant, is not to be regarded as a condition precedent to liability upon the subscription, and is nothing more than an independent stipulation for the breach of which the remedy would be in damages, in a case where the subscriber paid part of his subscription in cash, giving notes for the balance, to be paid upon call, and having become a director, after organization, without receiving his bonds, and especially as the mortgage to secure the bonds could only be obtained by payment of the fund subscribed.
3. “ Conditional subscriptions to stock of corporations are contrary to sound public policy, by reason of their tendency to mislead and ensnare creditors, and they ought not therefore to be encouraged.”

We are of opinion the demurrer to the petition in this case, was properly sustained, and the court did not err in dismissing the petition; the judgment of the common pleas is affirmed.