Case Name: William H. Stevens, Plaintiff, v. Olus Manufacturing Company, Defendant
Court: New York Supreme Court
Jurisdiction: New York
Decision Date: 1911-06
Citations: 72 Misc. 508
Docket Number: 
Parties: William H. Stevens, Plaintiff, v. Olus Manufacturing Company, Defendant.
Judges: 
Reporter: New York Miscellaneous Reports
Volume: 72
Pages: 508–511

Head Matter:
William H. Stevens, Plaintiff, v. Olus Manufacturing Company, Defendant.
(Supreme Court, New York Special Term,
June, 1911.)
Corporations: Power of corporation to make contracts and effect of ultra vires contracts — Ultra vires contracts: Stock—Preferred stock and increase or reduction of stock—- Reduction of capital stock — What constitutes reduction.
Where the corporate stock of a corporation was issued in consideration of the assignment to the corporation of patent rights, a contract by the company to assign to a stockholder certain of such patent rights in a stipulated territory in return for which the stockholder agrees to turn over his stock to the corporation and resign as an officer of the company is in violation of section 28 of the Stock Corporation Law, which forbids the directors to withdraw, or in any way pay to the stockholders or any of them any part of the capital of such corporation, or reduce its capital stock except as authorized by law.
Demubbeb to complaint.- .
Wing & Russell, for demurrant.
A. George Maul, opposed.

Opinion:
Giegerich, J.
The action is brought to enforce a contract claimed to have been made between the plaintiff and the defendant company, whereby the latter agreed to assign to him certain patent rights in a stipulated territory, in return for which he was to turn over his stock to the corporation and resign as vice-president and director of the company. The complaint alleges that the plaintiff conceived a certain new and useful improvement in the manufacture of garments, known as the Olus garments, which the plaintiff disclosed to Edward J. Quigley, William Ehret and Philip E. Heery, who were practical garment cutters; that said Edward J. Quigley and William Ehret completed the said improvement by making a model of an Olus garment, and the said Edward J. Quigley applied for certain letters-patent mentioned in the complaint, it being understood that the said Quigley, Ehret, Ileery and the plaintiff were to share equally in the profits and contribute equally to the expenses and losses; that thereupon the plaintiff, for the purpose of equitably dividing the interests of said Quigley, Ehret, Ileery and the plaintiff in said letters-patent, suggested the formation of a corporation to hold said letters-patent, manufacture thereunder and develop the same, and the defendant company was organized in the month of September, 1908, the letters-patent assigned to the defendant corporation, and stock therein issued to the persons above named in equal proportions. The complaint further alleges that after some discussion by the board of directors the plaintiff's proposal was accepted, and the company agreed to assign to the plaintiff .certain patent rights under the Olus patents enumerated in the complaint. A minute was made of the agreement in minutes of the board of directors to the effect that the plaintiff had presented his resignation as vice-president and as a member of the company, which was to go into effect by transferring his shares of stock to the company, and that the company was to grant territorial rights to the plaintiff as a payment for the same. The complaint further alleges that the plaintiff at the defendant's request had proper assignments of such territorial rights prepared at his own expense, presented them for execution and offered to perform the agreement on his part, but that the company by its officers' and agents failed to execute and deliver such assignments, and that there is a breach of contract on the part of the other three stockholders in the company by refusing to carry out the contract with the plaintiff so that they could sell their stock interests to better advantage. The defendant has demurred to the complaint for insufficiency. It appears from the allegations of the complaint that the patent rights represent the face value of the capital stock of the company, and it is manifest from a reading of the complaint that a withdrawal and decrease of the capital to the extent of the interest to be assigned, namely,' twenty-five per cent., would take place if the contract was enforced. This is clearly a violation of section 28 of the Stock Corporation Law, which so far as applicable provides: " The directors of a stock corporation shall not make dividends, except from the surplus profits arising from the business of such corporation, nor divide, withdraw or in any way pay to the stockholders or any of them any part of the capital of such corporation, or reduce its capital stock, except as authorized by law." The term " capital stock " as used in the statute similar to the one above quoted has been construed to mean, not share stock, but the property of the corporation contributed by its shareholders or otherwise obtained by it to the extent required by its charter. Williams v. Western Union Telegraph Co., 93 N. Y. 162; People ex rel. Wiebusch & Hilger Co. v. Roberts, 154 id. 101, 106, 107; People ex rel. Commercial Cable Co. v. Morgan, 178 id. 433, 439. The plaintiff contends that if the agreement were enforced there would be simply a reduced amount of stock outstanding proportioned to the patent rights of stock remaining, and hence there would be no real reduction of assets. This argument loses sight of the object of the provisions above quoted, which is to prevent the withdrawal of property which would reduce the value of the corporation's assets below the sum limited for its capital in its charter or articles of association. There, is no allegation in the complaint that the remaining patent rights are equivalent in value to the amount of the share capital issued. Under the provisions above set forth stock must represent property, and it is self-evident that where part of the assets of a corporation is withdrawn there is a corresponding reduction of its stock capital. There is no suggestion that the defendant was to receive an equivalent in property for the patent rights to be transferred. The complaint does not allege that the stock has any market value, and unless it is shown that there was a prior agreement for the sale of this stock at a price which would make up in value the patent rights transferred, or that the defendant had a surplus of property corresponding in value to the patent rights to be transferred, the agreement sought to be enforced is void. The mere fact that the stock was to be put into, the treasury of the company that it might be sold to others does not, therefore, meet these requirements. The present case is, therefore, distinguishable from Joseph v. Raff, 82 App. Div. 47; affd., 176 N. Y. 611. There the president pursuant to an agreement with the company resigned and sold his stock to the corporation, and the person who was to succeed him agreed to purchase said stock from the company. Here we have no such situation. It results from these views that the demurrer should be sustained, with costs. Settle decision on notice.
Demurrer sustained.