Case Name: LEO SENSABAUGH, Plaintiff and Respondent, v. POLSON PLYWOOD COMPANY, a Corporation, WILL TIDDY, H. H. MEES, GEORGE KERN, JOHN BIRD and ED FUNKE, Directors Thereof, Defendants and Appellants
Court: Montana Supreme Court
Jurisdiction: Montana
Decision Date: 1959-07-30
Citations: 135 Mont. 562
Docket Number: No. 10004
Parties: LEO SENSABAUGH, Plaintiff and Respondent, v. POLSON PLYWOOD COMPANY, a Corporation, WILL TIDDY, H. H. MEES, GEORGE KERN, JOHN BIRD and ED FUNKE, Directors Thereof, Defendants and Appellants.
Judges: MR. JUSTICES ANGSTMAN and BOTTOMLY, dissented in part.
Reporter: Montana Reports
Volume: 135
Pages: 562–572

Head Matter:
LEO SENSABAUGH, Plaintiff and Respondent, v. POLSON PLYWOOD COMPANY, a Corporation, WILL TIDDY, H. H. MEES, GEORGE KERN, JOHN BIRD and ED FUNKE, Directors Thereof, Defendants and Appellants.
No. 10004.
Submitted June 10, 1959.
Decided July 30, 1959.
Rehearing Denied September 1, 1959.
342 Pac. (2d) 1064.
MR. JUSTICES ANGSTMAN and BOTTOMLY, dissented in part.
Rankin & Acher, Helena, Doyle & Heinz, Polson, for appellants. Arthur P. Acher, Helena, and Stanley M. Doyle, Polson, argued orally.
Hamman & Gottwig, Polson, Smith, Boone & Rimel, Missoula, for respondent. F. N. Hamman and Donald E. Gottwig, Polson, argued orally.

Opinion:
MR. CHIEF JUSTICE HARRISON:
This is an action brought by a stockholder of defendant carpo ration to have an election of defendant's directors declared null and void and a new election ordered to be held.
The facts appear to be that from the date of incorporation of the defendant, Poison Plywood Company, hereinafter referred to as the Company, until April 21, 1956, plaintiff was a member of its board of directors and president. At a directors' meeting on March 7, 1956, a motion was adopted to appoint a committee to formulate amended by-laws for the Company. Such a committee was appointed by plaintiff and it drafted amended by-laws, including an amendment of Article III, Section 6 of the by-laws to change it to read as follows:
"Section 6. Every stockholder shall have the right to vote, in person or by proxy, for the number of shares of stock owned by him, for as many persons as there are directors or managers to be elected."
After due notice, the annual meeting of the Company was held on April 21, 1956, at which meeting the amended by-laws were presented, including the proposed amendment of Article III, Section 6, above quoted. The amended by-laws were adopted by unanimous vote of the stockholders present in person or by proxy, including the plaintiff. Plaintiff, along with the other directors of the Company, executed a ' ' Certificate of Adoption' ' of the amended by-laws.
At the annual stockholders' meeting in 1957, a resolution was duly adopted by the stockholders approving the minutes of the April 21, 1956, meeting, and the action of the stockholders in approving the amended by-laws adopted on April 21, 1956, was thereby ratified.
At the annual meeting of the stockholders of the Company held on April 19, 1958, after seven candidates had been nominated for directors but before balloting, the president of the meeting ruled that the stockholders would not be allowed to vote cumulatively, over the protests of the plaintiff. Certain ballots were nevertheless purportedly voted cumulatively, but were counted as straight ballots. Other stockholders wanted to vote cumulatively but did not do so by reason of the ruling of the president. On April 22, 1958, this action was filed.
The case was tried before the court without a jury and the district court found as a matter of law that the right to vote cumulatively is a right guaranteed by the Constitution of Montana, Art. XY, section 4, and section 15-405, R.C.M. 1947, and that such right cannot be abridged by a corporate by-law or resolution of the stockholders or by a ruling of the president; that even if the by-laws were treated as a contract between the stockholders and between corporation and stockholders that it was against public policy and void; that the election of directors was void and a new election was ordered to be held at which stockholders could cumulate their votes. Judgment was entered ordering a new election and defendants forthwith appealed.
There are but two issues in this appeal. First, may a corporation by a by-law deny the right of cumulative voting? Second, is a stockholder's contract to refrain from cumulative voting against public policy and void?
As to the first proposition, section 4, Article XY, Montana Constitution provides:
"The legislative assembly shall provide by law that in all elections for directors or trustees of incorporated companies, every stockholder shall have the right to vote in person or by proxy the number of shares of stock owned by him for as many persons as there are directors or trustees to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to distribute them, on the same principle, among as many candidates as he shall think fit, and such directors or trustees shall not be elected in any other manner."
R.C.M. 1947, section 15-405, provides:
"All elections must be by ballot, and every stockholder shall have the right to vote in person or by proxy the number of shares standing in his name, as provided in section 15-504 of this code, for as many persons as there are directors to be elected, or to cumulate said shares and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to distribute them on the same principle among as many candidates as he shall think fit. In corporations having no capital stock, each member of the corporation may cast as many votes for one director as there are directors to be elected, or may distribute the same among any or all of the candidates. In either case the directors receiving the highest number of votes shall be declared elected."
Nebraska has a constitutional provision similar to ours and the interpretation thereof was recently before their Supreme Court in the case of E. K. Buck Retail Stores v. Harkert, 157 Neb. 867, 62 N.W. (2d) 288, 294, 45 A.L.R. (2d) 774. That court stated:
"In considering the meaning of Article XII, section 5, of the Constitution, and section 21-135, R.S. 1943, it is proper to consider the evil and mischief attempted to be remedied, the objects sought to be accomplished, the scope of the remedy its terms apply, and give it such an interpretation as appears best calculated to effectuate the design of the constitutional and legislative provisions. It is clear to us that the purpose of the constitutional provision and statute enacted pursuant thereto was to provide for cumulative voting in the election of directors or managers of incorporated companies in order to secure to minority stockholders a greater representation in the management of the corporation's business. In order to do this it was necessary that the law state the number of votes to which each stockholder was entitled and to insure against an involuntary loss of the right conferred. In the accomplishment of the latter, the Constitution provides that 'such directors or managers shall not be elected in any other manner.' The latter prohibition, as we view it, operates to prevent a corporation by its articles of incorporation, by-laws, or any act of its directors or stockholders from depriving a stockholder of the right to vote his stock in the manner specified in the Constitution and statute.
"The result necessarily hinges upon the meaning to be given to the words 'and such directors or managers shall not be elected in any other manner.' It will be noted that Article XII, section 5, -of the Constitution provides that every stockholder shall have the right to vote in person or proxy for directors or managers on a'stock ownership basis for as many as there are directors to be elected, and he may cumulate his vote and distribute it among the candidates as he sees fit. Then follows the provision that directors shall be elected in no other manner.
"We think the meaning of the constitutional provision is clear. Its purpose is to provide for cumulative voting in the accomplishment of which it was necessary to fix the voting power of the shares of stock. In many states cumulative voting is permissive, — it could be properly included in the articles of incorporation, or not, as the incorporators might determine. The clause 'and such directors or managers shall not be elected in any other manner' was placed in Article XII, section 5, of the Constitution, to make it mandatory that every corporation within the purview of the constitutional provision should permit cumulative voting."
We agree with the reasoning of that court and hold that a corporation may not deprive a stockholder of the right of cumulative voting by any act on its part.
Turning to the second proposition, with regard to a stock- holder's right to contract. This issue was before the Supreme Court of Nebraska in the E. K. Buck Retail Stores v. Harkert case, supra, and in such opinion the cases cited to us by appellants and respondent are considered and discussed. It would unnecessarily extend this opinion to quote that entire discussion herein, but that court said:
"But such provision [Constitutional provision providing for cumulative voting] does not purport to limit the right of the stockholder to contract with reference to his stock. It grants him a right or privilege which he may or may not exercise as he sees fit, but it is one of which the corporation or any agency thereof cannot deprive him. Neither the constitutional provi sion nor the statute purports to limit the right of the stockholders to contract with other stockholders with respect to such right. ' '
Quoting from State ex rel. Frank v. Swanger, 190 Mo. 561, 89 S.W. 872, 876, 2 L.R.A., N.S., 121, the Nebraska Court said:
" 'A construction has nowhere been given to section 6, art. 12 [similar to sec. 4, art. XY, Mont. Const.], within our knowledge or research, so as to constitute it a prohibition or restriction on the right of stockholders to make their contracts which violate no rule of the common law, and which affect no rights, except their own'."
We agree with their conclusion. This answers the question as to whether the constitutional provision, in expressing public policy, forbids stockholders to contract among themselves with respect to voting their stock.
Here appellant contends that the by-law which does not pro-vide for cumulative voting, which we have heretofore declared invalid as a by-law, is enforceable as such a contract and that plaintiff is bound thereby. However, it must at all times be borne in mind the difference between stockholders' contracts between themselves without the realm of the corporate structure and those carried on or attempted within. Here we have the majority of the stockholders, including plaintiff herein, in 1956 desiring to bind themselves from cumulative voting. If their purpose at that time was, as appears from the record, for the good of the corporation and themselves as stockholders, they could have easily entered into a valid contract between themselves to that end. As was expressed in the E. K. Buck Retail Stores v. Harkert case, supra, the Constitutional provision involved here was not designed as a restriction on the rights of stockholders to make their contracts which violate no rule of the common law, and which affect no rights, except their own. Here the stockholders did not do so without the realm of the corporate structure but carried it within, by amending the by-law. By such a method the majority attempted to bind all stockholders, including those not represented at the meeting when the by-law was-amended.
It must further be remembered in this connection that the matter of initiating the move to dispense with cumulative voting did not arise among stockholders as such in the first instance. It made its appearance at a meeting of the board of directors on March 7, 1956, when a motion was presented to appoint a committee, to prepare amended by-laws, and the committee for that purpose was appointed by the president of the .corporation, and it drafted the by-law in question here. In other words the entire matter was handled within the corporate structure from its inception to its conclusion. To enforce this by-law, invalid as a by-law, as a contract, will amount to a deprivation of the right secured by section 4, Article XV, Mont. Const., the right- of a minority of stockholders to secure a greater representation in the management of the corporate business through the exercise of cumulative voting.
From what we have said herein there existed no binding contract at the time of the annual meeting on April 19, 1958, and the plaintiff's protest should have been sustained.
For these reasons the judgment of the district court is affirmed.
MR. JUSTICE CASTLES, concurs.