Case Title: Mobile Press Register, Inc. v. McGowin

Citation: 124 So. 2d 812

Docket Number: 

State: alabama

Court: Alabama Supreme Court

Date: 1960-11-17T00:00:00Z

Document:
124 So. 2d 812 (1960)
MOBILE PRESS REGISTER, INC., et al.
v.
Joseph F. McGOWIN, II, Individually and as Executor and Trustee under the last Will and Testament of Everette Leonard McGowin et al.
1 Div. 680.

Supreme Court of Alabama.
November 17, 1960.
*814 C. B. Arendall, Jr., Hand, Arendall & Bedsole, Mobile, for appellants.
Francis H. Inge, Inge & Twitty, Mobile, for appellees.
GOODWYN, Justice.
This case was originally assigned to another Justice. It was reassigned to the writer on February 8, 1960, for study and preparation of an opinion.
The question in this case concerns the preemptive rights of stockholders in a private corporation to subscribe to proportionate parts of a proposed new issue of stock in the corporation.
The complainants below, appellees here, own stock in The Mobile Press Register, Inc. The directors of said corporation adopted a resolution proposing to the stockholders that article 4 of the corporation's charter be amended so as to provide for an eight for one split of the corporation's 14,500 shares of no par value common stock, changing the new stock from a no par value to a par value of $4 per share, and authorizing a new issue of 6,650 shares of the $4 par value stock. As to the new issue, the proposed amendment provides as follows:
Appellees, for themselves and others similarly situated, filed a bill in the circuit court of Mobile County, in equity, against appellants (Ralph B. Chandler, William J. Hearin and Arthur C. Tonsmeire, Jr., individually and as directors of The Mobile Press Register, Inc., and as proxy holders of various stockholders of The Mobile Press Register, Inc., and George M. Cox) seeking the following relief:
The trial court granted the temporary injunction as prayed for and also, after the cause was submitted for final decree on the pleadings and a stipulation of the parties, granted a permanent injunction with respect to the 6,650 shares; the decree providing, in pertinent part, as follows:
The respondents bring this appeal from that decree.
The material facts, in addition to those already recited, may be stated as follows:
The Mobile Press Register, Inc., was incorporated under the laws of Alabama on February 15, 1932, under the name of The Mobile Daily Newspapers, Inc. It received its present name by amendment of its charter on August 11, 1948.
At the time this suit was commenced it had a total authorized capital stock of 14,500 shares of common stock all without nominal or par value, and all with full voting rights and powers. (Included in this total are the 354 shares, referred to above, which were sold to two executives of the corporationHearin and Coxpursuant to an amendment of article 4 of the corporation's charter on June 15, 1954, providing "that the stockholders shall not have any pre-emptive right to subscribe to the issue of any of the 354 shares of said stock which have not been sold prior to the adoption of this amendment, and said 354 shares may be issued by the Board of Directors of said corporation from time to time after the adoption of this amendment to such executive employee or employees of said corporation as said Board of Directors may select." The bill also seeks to have the sale of said stock cancelled and annulled and the stock returned to the corporation "to the end that should such shares again be sold, they be offered first to the stockholders having preemptive rights to purchase same." This relief was denied, the decree reciting that "the claim and cause of action with respect" to said stock "are barred by the provisions of Section 47 of Title 10 of the Code of Alabama of 1940." There is no cross-assignment of error questioning this holding.)
On August 26, 1955, the Board of Directors unanimously adopted the resolution above referred to proposing an eight for one splitting of the stock, changing the stock after splitting from no par value to a par value, and authorizing a new issue of 6,650 shares of stock.
*817 It was stipulated that neither the original certificate of incorporation nor any amendment thereto prior to the amendment of June 15, 1954, contained any provision expressly referring to the stockholders' preemptive rights.
It was further stipulated, in part, as follows:
The position taken by appellants is that "the legislature of Alabama has expressly authorized exactly what the respondents and the majority stockholders proposed to do, by Section 18 of Title 10 [as amended by Act No. 289, appvd. July 26, 1951, Acts 1951, p. 573] and by the Act of July 26, 1951 [Act No. 289, supra] (amending Section 2 of Title 10)"; that "such statutes are valid exercises of the reserved powers of the legislature as contained in Section 229 of the Constitution of 1901." It is also argued that if they are not correct in this contention, still the decree should be reversed because "the doctrine of pre-emptive rights contains an exception applicable to the proposed charter amendment, which exception is customarily called the `services exception'"; that "under this exception a corporation may issue stock to its executives without offering the same to all stockholders." In view of our conclusion that appellants' first insistence is meritorious, there is no need to discuss the second.
In their brief, appellants make this statement:
The general rule is that "in the absence of statutory restriction or restrictions in the charter of a corporation, if the capital stock of a corporation is increased and new shares of stock are issued, a holder of original stock is entitled to subscribe to the new issue in preference to nonholders and *819 on equal terms with other holders of the original stock in the proportion that the number of the original shares held by him bear to the total outstanding number of the original shares." 13 Am.Jur., Corporations, § 186, p. 309. See, also, 18 C.J.S. Corporations § 201b, p. 631; Annotations, 138 A. L.R. 527 and 52 A.L.R. 221.
We find no such statutory restriction now or formerly existing in this state; nor is there now, nor has there been, any such restriction in the corporation's charter, except with respect to the 354 shares referred to above. So that, unless there is valid statutory authority for amending the corporation's charter as proposed, which is applicable to the complaining stockholders, such preemptive rights as they have still stand and cannot be cut off. Thus, two questions are presented: First, is there statutory authority for amending the corporation's charter so as to restrict or cut off the complaining stockholders' preemptive rights with respect to the proposed new issue of stock? Second, if there is such statutory authority, is it constitutional when applied to the preemptive rights of the complaining stockholders in this case?
When the corporation was organized in 1932 the statutory authority for amending its charter was § 6982, Code 1923, providing as follows:
Section 6982 was carried, without change, into the 1940 Code as § 18, Tit. 10. Section 18 remained unchanged until amended by Act No. 289, appvd. July 26, 1951 (Acts 1951, Vol. I, pp. 573, 575), supra, providing, in pertinent part, as follows:
Act No. 289, supra, also amended § 2 of Tit. 10, Code 1940, (prescribing the contents of a certificate of incorporation), by adding thereto, among the changes made, the following significant provision:
So, it can be seen that, at the time of the proposed issuance of the additional 6,650 shares of stock, there was statutory authority for amending the corporation's charter with respect to the stockholders' preemptive rights in such stock.
(While not applicable to this proceeding, we call attention to the "Alabama Business Corporation Act", approved November 13, 1959, Act No. 414, Acts 1959, Vol. 1, p. 1055, and particularly §§ 4(9), 19, 22, and 42. Section 4(9) is the same as § 2(11), Tit. 10, Code 1940, as amended in 1951, supra. Section 19 corresponds to § 18, Tit. 10, as amended in 1951, supra, and includes the same provision with respect to the certificate of amendment containing "only such provisions as would be lawful and proper to insert in an original certificate of incorporation, made at the time of making such amendment." Sections 22 and 42 are new and provide as follows:
This brings us, then, to the second question, viz: Is such statutory authority constitutional when applied to the preemptive rights of the complaining stockholders? In other words, are the preemptive rights of these stockholders, having been acquired prior to passage in 1951 of Act No. 289, supra, (amending §§ 2 and 18, Tit. 10, Code 1940, so as to permit denying of preemptive rights by charter amendment), protected by the provisions of the Federal and Alabama Constitutions (Art. 1, § 10, Constitution of the United States; § 22, Alabama Constitution 1901) which forbid the passage of any law "impairing the obligations of contracts"?
To meet the holding in the Dartmouth College Case (Trustees of Dartmouth College v. Woodward, 4 Wheat. 518, 4 L.Ed. 629), Alabama, among other states, has included in its Constitution a reservation of power for amending the charter of a corporation. Section 229, Constitution 1901, contains these provisions:
(Section 229 was amended by Amendment XXVII, proclaimed ratified on January 2, 1936, so as to exempt building and loan associations from payment of a franchise tax. It was not changed otherwise and the amendment does not affect this case.) See, also, §§ 234 and 238, Constitution 1901.
In determining their contractual rights, the shareholders must look to the charter and by-laws of the corporation, and to statutory and constitutional provisions bearing on such rights. So, in this case, the appellees, in looking at the law, must have been informed by the provision contained in § 229, Constitution 1901, that, by appropriate corporate action under general laws thereafter enacted, their preferential rights to subscribe to new issues of stock could be impaired. The reserved power contained in § 229 is as much a part of the charter and certificates of stock of the corporation as though specifically set forth therein. Hence, when the stock held by appellees was issued the corporation's charter and each certificate of stock contained, as effectually as if actually written therein, the provision from § 229 that the charter of the corporation "shall be subject to amendment, alteration, or repeal under general laws." In legal effect, this power to amend under general laws was consented to by the stockholders when they purchased their stock. Consequently, the exercise of this power by the corporation pursuant to general laws would not impair the obligation of a contract. Any contractual rights the stockholders might have acquired incident to their stock ownership were subject to the condition that such rights could be changed in accordance with general laws thereafter enacted by the legislature. In other words, the stockholders may be said to have been put on notice that changes, such as here proposed, might later be authorized by general laws.
It seems to us that the legislature, in amending §§ 2 and 18 of Tit. 10, Code 1940, *822 by Act No. 289, supra, effectively complied with the constitutional "mandate" calling for amendment of charters under general laws and, in so doing, constitutionally authorized amendment of the corporation's charter so as to deny to the stockholders their preemptive right to subscribe to the additional stock proposed to be issued. This is consistent with the holding in Randle v. Winona Coal Co., 206 Ala. 254, 261-262, 89 So. 790, 797, 19 A.L.R. 118, from which we quote the following:
In Avondale Land Co. v. Shook, 170 Ala. 379, 54 So. 268, there was involved the reservation of power to amend contained in §§ 1 and 10, Article XIV, Constitution 1875. Those sections correspond to §§ 229 and 238, respectively, of the 1901 Constitution.
Section 1, Article XIV, Constitution 1875, contained this reservation: "All general laws and special acts passed pursuant to this section may be altered, amended, or repealed." Section 229 contains provisions of similar import (providing for passage of general laws "under which corporations may be organized and corporate powers obtained, subject, nevertheless, to repeal at the will of the legislature; and shall pass general laws under which charters may be altered or amended") and, in addition, as already noted, the following: "The charter of any corporation shall be subject to amendment, alteration, or repeal under general laws." It is obvious, as held in Randle v. Winona Coal Co., supra, that the power of amendment reserved in § 229, Constitution 1901, is broader than that contained in § 1, Art. XIV, Constitution 1875.
We are not concerned here with § 238, Constitution 1901. That section "refers merely to the power of the Legislature to alter, amend, or revoke charters of corporations * * *, and has no reference to the powers conferred on the corporation itself, which entered into the contract of the subscriber to stock." Bernstein v. Kaplan, 150 Ala. 222, 226, 43 So. 581, 583.
It seems to us that one significant distinction between the reservations in the two Constitutions is this: The power reserved in the 1875 Constitution authorized the state, acting by and through the legislature, to alter, amend, or repeal laws affecting corporations, in contrast to the additional reservation in the 1901 Constitution that "the charter of any corporation shall be subject to amendment, alteration, or repeal under general laws." Thus, the right of the corporation to amend its charter so as to affect the contract relationship between the corporation and its stockholders and the stockholders inter se was not clearly reserved in the 1875 Constitution as we think it is in the 1901 Constitution. (See Official Proceedings, Constitutional Convention 1901, Vol. 4, pp. 4456-4472, for discussion preceding approval of what is now § 229, Constitution 1901.) It does not appear that other state constitutions generally contain provisions as broad as the reservation added at the end of § 229, Constitution 1901.
We have given due consideration to appellees' contention that "a stockholder's preemptive right is a vested property right entitled to the same protection by law as other property rights and may not be taken away by the officers, directors or other stockholders without his consent." But can it be said that such right, when acquired, became "vested", that is, cannot be "destroyed, impaired, or divested" without the consent of the holder of such right (McDonald v. McDonald, 212 Ala. 137, 141, 102 So. 38, 41, 36 A.L.R. 761), in the face of the fact that the corporation's charter and the certificates of stock contained, in legal effect, at the time such right was acquired, the mandatory constitutional prescription that it "shall be subject to amendment, alteration, *824 or repeal under general laws"? We think not. This reserved right to amend, in such manner as the legislature may prescribe by general laws, became, as already noted, a part of each stockholder's contract. That is, the preemptive right, when acquired, was acquired subject to the express condition that it could, in effect, be "destroyed, impaired or divested by an amendment of the charter under general laws." There is no suggestion that the legislature exceeded its authority in passing Act No. 289, a general law, except, of course, insofar as it may be applicable to appellees' preemptive rights.
Whether the proposed action might run afoul of equity principles, we do not decide. It seems to us that disposition of the case in the trial court was based exclusively on the principle, as insisted upon by appellees, that the complaining stockholders have contractual and vested property rights with respect to the new issue of stock which cannot be impaired or taken away without their consent. Accordingly, under all the circumstances, including consideration of the parties' stipulation of facts and the decree, we think it appropriate to pretermit discussion on this appeal of appellees' argument, made in brief, that the decree should be affirmed on the theory that the proposed action by appellants amounts to a constructive fraud upon the appellees. It seems apparent that the trial court did not consider this in arriving at a decision (assuming that the bill sufficiently charges bad faith and a constructive fraud upon appellees). In fact, it appears that the parties themselves confined the issue for decision to one of classic constitutionality involving the contract and due process clausesthat is, whether the proposed action by appellants was constitutional insofar as it concerns the common law preemptive rights of the objecting stockholders and others similarly situated. We have confined our discussion to that question.
Much has been written concerning the amendment of charters under the reserved power. That the authorities are not in accord is apparent from a reading of the many cases dealing with the problem. As said in Fletcher, Cyclopedia of the Law of Private Corporations, Perm. Ed., Vol. 7, § 3695, pp. 854-856:
Among the cases cited in support of Note 2 is Randle v. Winona Coal Co., supra. For other cases see the notes to § 3695, including those in the cumulative supplement. For discussions of the subject in general, see: Annotations, 138 A.L.R. 526, 117 A.L. R. 1290, 111 A.L.R. 1525, 105 A.L.R. 1452, 72 A.L.R. 1252, 62 A.L.R. 573, 52 A.L.R. 220; 13 Am.Jur., Corporations, §§ 186, *825 421; 69 Harv.L.Rev. 538 ("Limitations on Alteration of Shareholders' Rights by Charter Amendment"); 50 Columbia L.Rev. 900 (Becht, "Corporate Charter Amendments; Issues of Prior Stock and the Alteration of Dividend Rates"); 36 Cornell L.Rev. 1 (Becht, "Changes in the Interests of Classes of Stockholders by Corporate Charter Amendments Reducing Capital, and Altering Redemption, Liquidation and Sinking Fund Provisions"); 14 Notre Dame Lawyer 23 (deFuniak, "Reducing Rate of Dividend on Preferred Stock"); 23 Va.L.Rev. 579 ("Equitable and Constitutional Limitations on the Reserved Power to Amend Corporate Charters"); 34 Mich.L.Rev. 859 ("CorporationsAmendment of Corporate ChartersPower of the Legislature to Authorize Changes in Intracorporate Affairs"); 3 U. of Chicago L.Rev. 327 ("CorporationsAmendment of Charter Right of Minority Stockholder to Object to Changes in Charter under Statute Subsequent to Incorporation"); 13 Tenn.L. Rev. 62 ("Private CorporationsCharter Amendment Permitting withdrawal of Stockholder"); 21 St. Louis L.Rev. 12 ("Constitutional Limitations Upon Legislative Power to Alter Incidents of the Shareholder's Status in Private Corporation"); 32 Mich.L.Rev. 743 (Curran, "Minority Stockholders and the Amendment of Corporate Charters"); 29 Mich.L.Rev. 432 (Ohlinger, "Some Comments on the Reserved Power to Alter, Amend and Repeal Corporate Charters"); 31 Columbia L. Rev. 1163 ("Power of the State to Alter Corporate Charters"); 43 Harv.L.Rev. 586 (Drinker, "The preemptive Right of Shareholders to Subscribe to New Shares"); 42 Harv.L.Rev. 186 (Morawetz, "The preemptive Right of Shareholders"); 38 Yale L. Journal 563 (Frey, "Shareholders' Pre-emptive Rights").
Appellees have moved for dismissal of the appeal on the ground that the question presented for decision is now moot. This is based on action taken by the corporation, after submission of the case here, splitting the stock as proposed, but without issuing the additional 6,650 shares. Apparently, the splitting of the stock was without objection of the stockholders. It is argued that the action thus taken makes it unnecessary to decide any further question concerning the issuance of the additional 6,650 shares. Since appellants have been permanently enjoined by the trial court's decree from issuing and selling said 6,650 additional shares, without giving to appellees and others similarly situated an opportunity to subscribe and pay for proportionate parts of such new issue, it can hardly be said that the question as to appellants' authority to take action as they propose has become moot. Clearly, the question as to the propriety of the permanent injunction was not rendered moot by the action taken in splitting the stock.
The decree is due to be reversed, except that part dealing with the 354 shares of stock, and the cause remanded. It is so ordered.
Reversed and remanded.
LIVINGSTON, C. J., and SIMPSON, MERRILL and COLEMAN, JJ., concur.