Opinion ID: 2633044
Heading Depth: 1
Heading Rank: 6

Heading: Redemption or Purchase

Text: Even if the restrictions can be imposed in the bylaws under the provisions of K.S.A. 17-6426, the Physicians contend that Capano is distinguishable because it dealt with a restriction on the transfer of stock or, alternatively, a forfeiture of the stock, not a redemption of stock. They assert that the legislature's failure to use the term redemption in K.S.A. 17-6426 clearly means that the statute does not apply to redemption rights, and the district court's application of the statute erroneously expanded the statute's scope. Again, this argument requires us to interpret several Kansas statutes and the bylaws. Our review is de novo. Code Provisions Regarding Redemption and Purchase As the Physicians argue, redemption and purchase are differentiated in several provisions of the Kansas General Corporation Code. K.S.A. 17-6401(b) speaks specifically about redemption: The stock of any class or series may be made subject to redemption by the corporation at its option or at the option of the holders of such stock or upon the happening of a specified event. The terms of the redemption, including the price, shall be stated in the articles of incorporation. K.S.A. 17-6401(b)(2). K.S.A. 17-6410 uses both terms. K.S.A. 17-6410(a) provides that every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares. Subparagraphs of 17-6410 then differentiate between the two terms. K.S.A. 17-6410(a)(2) provides the power of a corporation to purchase, for more than the price at which they may then be redeemed, any of its shares which are redeemable at the option of the corporation, and subparagraph (3) refers to the power of a corporation to redeem any of its shares but does not mention a power to purchase shares. Furthermore, there is a distinction in the statutes regarding whether the rights and powers to purchase and redeem stock must be stated in the articles of incorporation. No provision requires the articles to restate the corporation's statutory power to purchase its own stock. In contrast, every redemption must be authorized by K.S.A. 17-6401(b) and must be carried out in accordance with that statute and the articles of incorporation. Kansas Corporation Law & Practice § 2.18 (4th ed.1998); see also 11 Fletcher, Cyclopedia of the Law of Private Corporations § 5308, p. 533 (rev. ed.2003) (terms of any redemption right attaching to a class of shares must be set out in the provision of the articles of incorporation authorizing the shares, unless the articles empower the board to set such terms for authorized shares); Folk § 151.2 (4th ed.2005) (section 151[b] of the Delaware Code, which is equivalent to K.S.A. 17-6401[b], allows stock to be redeemed upon the happening of any specified event listed in certificate of incorporation or resolution providing for the issuance of stock adopted by the board of directors). Pointing to these statutory differentiations of the term, the Physicians cite the doctrine of independent legal significance. Under the doctrine of independent legal significance, action taken under one article of the Kansas Corporation Code is legally independent and its validity not dependent upon nor to be tested by the requirements of other unrelated sections under which the same result may be attained by different means. In re Hesston Corp., 254 Kan. 941, Syl. ¶ 7, 870 P.2d 17 (determining merger is legally distinct from redemption). As a result of application of the doctrine, the Physicians argue a redemption is governed by K.S.A. 17-6401, and the validity of a redemption cannot be tested by the requirement of K.S.A. 17-6426, even though the final result may be the same under either provision, i.e., the reacquisition of the corporation's stock. Purchase vs. Redemption We reject the Physicians' argument for several reasons. First, the argument's faulty premise is that a word in a corporation's bylaws must have the meaning accorded to the word in a statute, even though it may be a word with multiple meanings. Additionally, the argument eliminates consideration of purchase as a form of redemption, and as a form of redemption for which a statutory exception to K.S.A. 17-6401(b) has been made. Finally, the argument does not recognize that, although using the words separately and distinctly, the Kansas General Corporation Code does not explicitly define when a corporation's reacquisition of its own stock is a purchase and when it is a redemption. What then is the distinction between purchase and redemption? One corporation law treatise states that [a] redemption right held by the issuing corporation allows the corporation, at its option, to call in all or a pro rata portion of its redeemable shares, and buy them back at a specified price plus accrued dividends. 11 Fletcher § 5308, p. 532. Another treatise explains: A redemption of its own shares by a corporation differs from a purchase in that a corporation redeeming shares calls for redemption shares (usually preferred) issued subject to redemption. And while a purchase may be made from any one or more shareholders, a redemption usually must be made of all the shares of the class or series subject to redemption or, if of less than all, either pro rata or by lot. 11 Cavitch, Business Organizations With Tax Planning § 147.01[2] (2001). The use of the term redemption in CHW's articles of incorporation or bylaws would not fit either of these definitions. Additionally, [t]he distinction made here between the terms `purchase' and `redemption' is not universally recognized. Modern state corporation statutes governing stock repurchases no longer distinguish between redeemable shares and other types of shares. The Internal Revenue Code refers to all corporate distributions to shareholders in return for their stock as `redemptions.' The major stock exchanges have a tendency to do likewise. In addition, there are courts that use the term `redemption' as the generic term for all corporate share reacquisitions. The imprecision of terminology is understandable, as the end result is similar whether there is a purchase or a redemption. 11 Cavitch, at § 147.01[2]. As these authorities illustrate, the term redemption has more than one meaning and a purchase is a form of redemption. Further, under these various meanings, when K.S.A. 17-6426 authorized the corporate purchase of stock pursuant to a stock restriction on transfer or ownership, it authorized a form of redemption. Given these alternative meanings, the critical question in this case is: What would a reasonable third party understand to be the meaning of the term redemption in the parties' contract, the bylaws? We frame the issue in this way in light of the basic rules regarding the interpretation of corporate bylaws. It is a well-settled rule that the bylaws of a corporation are self-imposed rules, resulting from an agreement or contract between the corporation and its members to conduct the corporate business in a particular way. Schraft v. Leis, 236 Kan. 28, 34-35, 686 P.2d 865 (1984). Consequently, corporate instruments such as charters and bylaws are interpreted in the same manner as other contracts. Dutta v. St. Francis Regional Med. Center, Inc., 254 Kan. 690, 696-97, 867 P.2d 1057 (1994); see Harrah's Entertainment, Inc. v. JCC Holding Co., 802 A.2d 294, 309 (Del.Ch.2002). Where the parties have created an unambiguous, integrated written statement of their contract, the language of that contract will control, not as subjectively understood by either party but as understood by a hypothetical reasonable third party. First Financial Ins. Co. v. Bugg, 265 Kan. 690, 694, 962 P.2d 515 (1998). Additionally, even if a word has two or more meanings, a document is ambiguous only if an examination of the entire document leaves a genuine uncertainty as to which of the two meanings was intended by the parties. See Narron v. Cincinnati Ins. Co., 278 Kan. 365, 369, 97 P.3d 1042 (2004). Finally, bylaws of a corporation are presumed to be valid, and the courts will construe the bylaws in a manner consistent with the law rather than strike down the bylaws. Frantz Manufacturing Co. v. EAC Industries, 501 A.2d 401, 407 (Del.1985). This rule suggests that we should read the bylaw to use the term redemption in a generic sense. We reach this same conclusion when we examine the context of the use of the word redeem in CHW's bylaw section 1.5 as compared to its use in the context of various provisions of the Kansas General Corporation Code. A Pennsylvania court undertook a similar analysis in a case discussed by the parties, Wyatt v. Phillips, 2004 WL 51693 (Pa.Commw.2004), aff'd 880 A.2d 20 (Pa.Super.2005). The court applied the Delaware General Corporation Code to its consideration of a shareholders' agreement and a consent decree, considering both as contracts. The consent decree provided for the payment of a specified sum to consummate the acquisition of a shareholder's interest in the corporation. The consent decree did not explicitly use the term purchase or redeem, and the parties disagreed as to how the transaction should be classified. The shareholders' agreement did provide the corporation could redeem its stock if a third party made an offer to buy shares. After examining the Delaware General Corporation Code requirements regarding redemption, the court determined the shares, by their nature, were not issued with redemption rights. 2004 WL 51693, at . In large part, this conclusion was based upon the lack of redemption rights in the articles of incorporation. In addition, the court cited a statutory requirement that provided: Any stock of any class or series may be made subject to redemption by the corporation . . . provided however, that immediately following any such redemption the corporation shall have outstanding 1 or more shares of 1 or more classes or series of stock, which share, or shares together, shall have full voting powers. Del.Code Ann. tit. 8, § 151(b). 2004 WL 51693, at . Just as in Wyatt, the stock in this case was not structured to meet the requirements of Del.Code Ann. tit. 8, § 151(b) or its Kansas counterpart. Although arguing another point, the Physicians note that Kansas had a provision identical to Del.Code Ann. tit. 8, § 151(b) at the time the articles of incorporation and original bylaws were adopted and when Dr. Idbeis' stock was redeemed. K.S.A. 17-6401(b) (Furse). Yet, CHW had only one class of stock. Consequently, by its nature, the stock at issue was not statutorily redeemable. Given that fact, CHW's bylaw provision was ambiguous. Moreover, because the stock was not statutorily redeemable, a reasonably prudent third party would understand the word to be used in a nonstatutory manner. This conclusion is reinforced when we examine the purpose of section 1.5(e) of the bylaws because we conclude that the section does not meet the general purpose of a redemption provision. This same conclusion was reached under similar facts in In re West Waterway Lumber Co., 59 Wash.2d 310, 367 P.2d 807 (1962). The corporate bylaw at issue in that case read: `[I]n case of the death of any Stockholder or the dissolution of any corporate Stockholder or the insolvency or bankruptcy of any such Stockholder, or in case any such Stockholder voluntarily, for the period of one year, ceases to continue in the manufacture of lumber, then and in that event this corporation shall have the right to call in, retire and cancel the capital stock so held by such Stockholder, upon payment to the heirs, executors, trustees or successors in interest of such person or corporation, of an amount equal to the book value but not exceeding par value of such stock.' 59 Wash.2d at 315, 367 P.2d 807. The petitioners contended that the bylaw's purported right of redemption was unauthorized. The Washington Supreme Court disagreed: Respondents suggest that the quoted portion of the bylaw is in fact a provision for redemption of common stock and as such is valid. RCW 23.01.440 authorizes redemption of preferred shares, but no mention is made in the statute of redeeming shares of common stock. . . . We do not believe the bylaw may properly be construed as an attempt to authorize redemption. The purpose of the provision, when taken with the rest of the bylaws and with the articles of incorporation, is clear enough. Only persons defined as `legitimate manufacturers of lumber on the Pacific Coast' are entitled to own shares of the Export Company. A shareholder who dies or goes out of business no longer qualifies. In order to implement the reasonable restriction of eligibility, it is essential that the Export Company have available to it some means of enforcement. The power of the Export Company to reacquire its shares is not a continuing one; indeed, it arises only upon events not within its control. 59 Wash.2d at 319, 367 P.2d 807. The court emphasized that the power of redemption usually enjoys a significantly different characteristicaside from the controls imposed by law, it may be exercised at the will of the corporation, subject only to such restrictions regarding current financial status, impersonal selection of the group to be redeemed if less than the whole class is called, and such other limitations as may have been expressly stated. 59 Wash.2d at 319, 367 P.2d 807. Considering the terms of the bylaw in context, the court concluded that it did not constitute a redemption provision. 59 Wash.2d at 320, 367 P.2d 807; see also Glens Falls Ins. Co. v. National Bd. of Fire Underwriters Bldg. Corp., 63 Misc.2d 989, 314 N.Y.S.2d 80 (1970) (reacquisition of shares, pursuant to certificate of incorporation providing that, if shareholder ceased membership in trade association or transferred shares to nonmember, shares could be redeemed at option of association at par value, was not redemption barred by statute which had been enacted after adoption of such certificate provision and which precluded redemption unless corporation had outstanding a class of common shares not subject to redemption). In re West Waterway Lumber Co. is distinguishable in that the provisions at issue did not include the word redemption and the statutory schemes contained differences regarding the classes of stock that could be redeemed. Nevertheless, the rationale of the decision regarding the role of the bylaw provision as being akin to a shareholder's buy-sell agreement is persuasive. Clearly, the purpose of CHW's bylaw section 1.5 was to function as an agreement among the stockholders in order to assure eligibility requirements are met. The reasons that would trigger the reacquisition of the stock are not within the control of the board of directors and would not be targeted at a class of stock. Rather, it would be targeted at the holder of the stock who no longer meets eligibility requirements as defined in the contract among the shareholders. Other factors noted by the Washington court apply in this case as well. Corporate finance, control, preferred ownership, or other considerations such as creditors' rights or equity protection were clearly not involved. Nor is there any indication that the provision affects the corporate structure (financial or otherwise), shareholders, or creditors. Its only purpose is to limit ownership eligibility, and this purpose does not parallel the usual features of a redemptive right. We conclude the use of the word redemption in CHW's bylaw section 1.5(e) is susceptible to more than one meaning and, when considered in the context of the bylaw and Kansas' statutes, would be understood by a reasonably prudent person to mean CHW had the power to purchase the stock at the predetermined price. Therefore, section 1.5, as a restriction on transfer and ownership and allowing for CHW to reacquire the stock, was valid and enforceable and did not violate K.S.A. 17-6401(b) or K.S.A. 17-6410. As a result of this conclusion, we do not reach the district court's alternative conclusions regarding equitable considerations. Nor do we need to discuss Dr. Idbeis' argument regarding the illegality of a redemption under K.S.A. 17-6401(b), as that provision does not apply given the context of the bylaw provision.