Opinion ID: 597120
Heading Depth: 3
Heading Rank: 1

Heading: Restrictions on Alienation of Corporate Stock.

Text: 29 The jurisprudence of Louisiana reflects over a century of use of restrictions on the alienation of corporate stock. 5 Nevertheless, the efficacy of such restrictions was not expressly recognized by the courts of the state until 1964. 6 Coincidentally, the restriction approbated in that case was, like the one now before us, a right of first refusal. 30 This type of restriction has long been recognized as serving valid purposes in closely-held corporations, principal among which are 1) controlling the makeup of the shareholder group, and 2) preventing the stock from falling into the hands of undesirable corporate partners. 7 Even though, as correctly found by the bankruptcy court in the instant case, the courts of Louisiana at least give lip service to the maxim that restrictions on alienation of corporate stock are to be construed narrowly because they impinge on free transferability of corporate ownership, 8 such a position is not universally applauded. It was roundly criticized, for example, by Professor Tom Andre, Jr. of the Tulane University School of Law in his definitive work on the subject 9 as lacking any valid public policy foundation either in the Louisiana Civil Code or other legislation. Professor Andre makes a flawless argument for liberal construction of such restrictions, illustrated with numerous valid business and tax purposes for their use and evenhanded enforcement. Nevertheless, for purposes of the instant case, we follow the dictates of constant Louisiana jurisprudence as it currently stands, and strictly construe Article VIII of the charter of Lucullus, Inc. 31 Before parsing that charter provision, however, we are constrained to make several observations. First, assuming he can prevail on the issue of the restriction's applicability to the transaction here under litigation, Adler contends that the purported pledge to the Bank by Hill in violation of the restriction is void, i.e., absolutely null. He contends in the alternative, however, that even if the transaction is not absolutely null it is at least voidable, i.e., relatively null. Although we assume without determining that a transfer or encumbrance in violation of such a stock restriction is not an absolute nullity and at least is valid between the parties--after all, it may be waived or ratified by the corporation or the other shareholders--it is sufficient for our purposes that if the restriction applies to pledge and if Hill's purported pledge to the Bank violates the restriction, relative nullity is all that is required to support Adler's attack on the transaction. Unlike the corporation and the other shareholders, who might have waived, acquiesced in, ratified or otherwise acted (or failed to act) in such a manner as to abrogate their right to attack the purported pledge transaction, the trustee in bankruptcy has standing and acted timely to annul the subject transaction. 32 Second, we find no support for the secondary holding of the bankruptcy court that, even though the restriction of Article VIII is inapplicable to pledge, the Bank as pledgee is bound to offer the stock to the other shareholders (presumably for book value as specified in Article VIII) before foreclosing on the pledge by selling the stock. By its own terms the stock restriction applies only to a shareholder, and the bankruptcy court has already determined, correctly, that pledge does not transfer title. Thus, even if Hill's pledge to the Bank is neither void nor voidable under the transfer restriction, the pledgee Bank is still not a shareholder. Consequently, if we were to conclude that the restrictions of Article VIII do not prohibit pledge, thereby validating Hill's pledge to the Bank, the first refusal provisions of Article VIII would be equally inapplicable and would, therefore, impose no duty on the Bank, as a non-shareholder pledgee, to offer the stock to the corporation or the other shareholders. In short, either all features of the charter restriction apply or none does. 33 Third, we disagree with the bankruptcy court's contention that hypothecate is the only type of transaction among those proscribed by Article VIII that is not a title-transferring act. Specifically, the word hypothecate is followed by the word assign. Assign in current legal parlance may signify either a title transferring act or a pignorative act, depending on the context in which that term is used. For example, when a legal document refers to a lessee's assignment of a lease--particularly a mineral lease--the statement usually connotes transfer of title (although it is not unheard of for a mineral lessee to assign leasehold interests, particularly future royalties or runs, to a lending institution or other creditor by way of collateral). Similarly, a lessor may assign rents or royalties, whether to a third party purchaser or to a creditor. On the other hand, an assignment under the Louisiana Assignment of Accounts Receivable Law, 10 from the creditor/owner of the receivables to his lender or creditor, is clearly a pignorative transaction with title remaining in the assignor until or unless the underlying obligation secured by such assignment becomes delinquent. In each instance, then, the context must be considered before making a determination whether the parties intend for the assignor of the lease to transfer title or merely to encumber his or her lease or leasehold interest. 34 The point we make is not that Hill might be found to have assigned his stock to the Bank in some sort of secured transaction; clearly, the transaction attempted was pledge if it was anything. Rather, the point we make is that assign, as used in the Lucullus charter restriction, does not necessarily refer exclusively to a title-transferring transaction--if it refers to such a transaction at all. Like hypothecate, one of the meanings of assign in Article VIII could well be that of collateral assignment. As such, the use of hypothecate, assign in the proscription sentence of Article VIII could support an interpretation, under the doctrine of ejusdem generis, that would encompass any recognized method of encumbering corporate stock--pledge being preeminent among such encumbrances known to the law of Louisiana. 35 But, as explained more fully below, we need not explore such an interpretative process. At this juncture, it suffices that Adler as trustee in bankruptcy would be entitled to a judgment nullifying Hill's purported pledge of his Lucullus stock to the Bank if, in the context employed in Article VIII of the corporate charter, hypothecate is found to be synonymous with pledge. And if that should turn out to be the case, the uncontested facts confirm beyond peradventure that Hill made no effort to comply with the prerequisite for encumbering his stock--offering that stock to his fellow shareholders at book value for a period of thirty days--and that the Bank did not require such compliance despite its conceded knowledge of the legend and restriction. We turn, therefore, to the meaning of hypothecate. 36