Opinion ID: 1381928
Heading Depth: 1
Heading Rank: 5

Heading: Amendment of Corporate Bylaws

Text: At the January 22, 2003 meeting of shareholders and directors, the directors, inter alia, by a vote of Hinkle's 51 shares for and appellants 49 shares against voted to amend Article IV, Section 1, of the bylaws. As a result, the requirement that a director be a shareholder was deleted. Hinkle was then able to use his majority of votes to install his wife, Janet, in Hufstedler's place on the board of directors. Taylor and Hufstedler, meanwhile, pooled their votes in order to keep Taylor on the board. For their second point on appeal, Taylor and Hufstedler contend that the trial court erred in finding that Hinkle had the power to amend the corporation's bylaws. Again, we disagree. Article 5 of the articles of incorporation provides: The power to amend or repeal the bylaws or to adopt a new code of bylaws shall be in the shareholders acting by a majority thereof and also in the board of directors acting by a two-thirds (2/3) vote of the directors. (emphasis added). In their briefs to this court, Taylor and Hufstedler admit that this language could be interpreted as allowing Hinkle to amend the bylaws by a simple majority vote of shares, or, as requiring a vote of a majority of the holders of the shares. However, they argue that if this language is read in conjunction with the other sections of the bylaws and articles of incorporation, then it is clear that the articles can only be amended by a 2/3 majority of the shareholders. Specifically, they contend that Article 13 of the bylaws, alone, controls the amending of the corporate bylaws. Article 13 provides: These bylaws may be altered or amended by a vote of the majority of the holders, in good standing, of the fully paid-up common stock at any annual or special meeting of the stockholders at which a quorum is present, but notice of the proposed change shall be given in the call of the meeting. While it is true that, as a general rule, the specific provisions of a contract control the general provisions, see Pate v. Goyne, 212 Ark. 51, 204 S.W.2d 900 (1947), under the facts of this case, the appellants are mistaken. In its order, the trial court cited Article 3, Section 5 of the bylaws, which states in pertinent part: Only holders of fully paid-up common stock in good standing shall have or exercise voting rights. Each share of common stock shall have one(1) vote. In addition to Article 3, Section 5 of the bylaws, the trial court relied upon Ark. Code Ann. § 4-27-1020, which provides in part: A. A corporation's board of directors may amend or repeal the corporation's by-laws. B. A corporation's shareholders may amend or repeal the corporation's bylaws even though the bylaws may also be amended or repealed by its board of directors. Based upon its reading of both the articles of incorporation and § 4-27-1020, the trial court correctly interpreted article five to allow amendment of the bylaws by either the stockholders or the directors. The question then becomes whether, when amending the bylaws, the board of directors vote per shareholder or per share. The trial court determined the latter. We agree. Article 3, Section 5 of the bylaws goes on to say: A quorum shall be constituted when the person owning at least fifty-one percent (51%) of the outstanding and issued shares of stock, as indicated by the stock transfer register of the corporation, are in attendance. This quorum may transact the business of any meeting of the stockholders of this corporation, and a vote of the majority of such stockholders in attendance at such meeting shall be sufficient to pass or reject any properly proposed measure, except for the transaction of business which requires a different quorum or majority either by statute of this state or by the Articles of Incorporation of this corporation. A quorum is defined by Article 3, Section 5 of the bylaws as the person owning at least 51% of the outstanding shares and issued shares of the stock. Appellants point to the apparent ambiguities between Article 3, Section 5, and Article 13 of the bylaws in asserting that any such ambiguities should be construed against the drafter, Hinkle, under the doctrine of contra proferentem. Sturgis v. Skokos, 335 Ark. 41, 977 S.W.2d 217 (1998). However, the Sturgis case went on to say that if there is an ambiguity, a court will accord considerable weight to the construction the parties themselves give to it, evidenced by subsequent statements, acts, and conduct. Id. It is well-settled that the polestar of contractual construction is to determine and enforce the intent of the parties. Harris v. Stephens Production Co., 310 Ark. 67, 832 S.W.2d 837 (1992). This rule trumps all others, even the doctrine of contra proferentem. Id. In ascertaining this intention, the court should place itself in the same situation as the parties who made the contract in order to view the circumstances as the parties viewed them at the time the contract was made. Asimos v. T.L. Reynolds & Sons, Inc., 244 Ark. 1042, 429 S.W.2d 103 (1968); Sternberg v. Snow King Baking Powder Co., 186 Ark. 1161, 57 S.W.2d 1057 (1933). In the case at bar, the copious correspondence between the parties' attorneys indicates that the appellants certainly believed that Hinkle had the authority to unilaterally amend the bylaws. Skip Smith, Taylor and Hufstedler's lawyer, in his May 13, 1998 letter to Bob Donovan, Hinkle's lawyer, stated, in pertinent part: The bylaws already provide that only shareholders may be directors of the corporation. Currently, however, with his majority control, Michael Hinkle could conceivably amend the bylaws to delete this provision, then use his ownership to elect an outside director. After he acquiesced and allowed Hinkle to assume 51% ownership and control of the corporation, Taylor became angry and refused to help capitalize the corporation, despite an earlier agreement to do so. Furthermore, the long history of discord between the parties indicates that neither Taylor nor Hufstedler truly believed that it would take a 2/3 per capita vote to remove a board member, or carry out other major corporate actions. Accordingly, the appellants could not have reasonably believed their seats on the board of directors were protected by a requirement of per capita voting on amendments to the bylaws. We have held that documents are to be construed in a manner which gives reasonable and sensible effect to all clauses of the contract, within the entire context of the agreement. Sturgis, supra . Based upon the four corners of the corporate contract and parties' subsequent conduct regarding said contract, we cannot say that the trial court erred in finding that Hinkle's actions at the January 23, 2003 shareholders meeting were authorized by the articles of incorporation. In fact, if one were to follow Taylor and Hufstedler's argument to its logical conclusion, a person holding 98% of the shares in a close corporation could be subjugated to the will of other shareholders who collectively hold two percent, resulting in an absurd result. Accordingly, we affirm the trial court on this point as well.