Court Opinion

ID: 6549096
Source: CourtListenerOpinion
Date Created: 2022-07-19 22:22:26.023404+00
Date Added: 2024-06-11T15:56:03.450432
License: Public Domain

Wood, J., (after stating the facts). Our Constitution provides that “no private corporation shall issue stocks or bonds, except for money or property actually received or labor done, and all fictitious increase of stock or indebtedness shall be void; nor shall the stock or bonded indebtedness of any private corporation be increased, except in pursuance of general laws, nor until the consent of the persons holding the larger amount in value of stocks shall be obtained at a meeting held after notice given for a period not less than sixty days, in pursuance of law.” Art. 12, § 8, Const, of Ark. Section 838 of Kirby’s Digest provides as follows: “The amount of capital stock in every joint-stock corporation shall be fixed and limited by the stockholders in their articles of association, and shall be divided into shares of twenty-five dollars each; but every such corporation may increase its capital stock, and the number and amount of shares therein at any meeting of the stockholders specially warned for that purpose. ” Section 856 provides as follows: “When any such corporatipn shall increase its capital stock, as provided in section 838, the president and directors shall, within thirty days thereafter, make a certificate thereof, which shall he signed, deposited and recorded as provided in section 845.” It will thus be seen that our Constitution and laws provide for the increase of capital stock of private corporations. A distinction is made in the authorities to this effect: Where, under the Constitution and laws, an increase of capital stock is prohibited, or where such increase is permitted but declared by statute to be illegal unless the statutory requirements for its increase and issuance are observed, in all such cases the irregular increase and issuance of such stock on the part of the corporation is a fraud, and those who have purchased such stock may rescind the contract and sue the corporation for the money paid for such stock; or, if a subscription to such stock is unpaid, the subscriber thereto may repudiate the contract, and is not estopped by his subscription or anything he may have done as a holder of such stock. In other words, the increase of stock under such Constitution and statutes (unless in compliance therewith) is ultra vires and utterly void. But where the Constitution and laws, as do ours, expressly authorize the increase of stock and provide for certain statutory procedure, which is not a prerequisite to the validity of the stock, in such cases one who has subscribed and has not paid for shares of the increase of stock, or who has purchased and paid for same, is estopped from asserting that he is not a stockholder. He may be held for his subscription to such stock, or if he has paid for same he can not repudiate the contract and sue the corporation for money illegally obtained. The distinction is recognized in the case of the American Tube Works v. Boston Machine Co., 139 Mass. 5, 11, cited and relied on by learned counsel for appellants. In that case the court said: “The issue of special stock being invalid and being open to repudiation by the corporation itself, or by dissenting stockholders, the plaintiff had an election to rescind the contract under which the special stock was taken, and to be restored to its original position. It was not bound by any estoppel. In all the cases which have come under our observation where one has beén held to be deemed a stockholder by estoppel, there has been a legal creation of the capital stock. But where the issue of the shares is illegal, where no sufficient steps have been taken to authorize the creation of the special stock, where a person has acted and been treated as a stockholder in respect to shares which the company had no power to issue, and where the shares can not legally exist, the person taking them can not, by estoppel or otherwise, become a member in respect to them.” The Supreme Court of the United States also recognizes the distinction in Scovill v. Thayer, 105 U. S. 143, p. 149, where the court said: “It is true that it has been held by this court that a stockholder can not set up informalities in the issue of stock which the corporation had the power to create. (Citing authorities). But those were cases where the increase of the stock was authorized by law. The increase itself was legal and within the power of the corporation, but there were simply informalities in the steps taken to effect the increase. These, it was held, were cured by the acts and acquiescence of the defendant. “But here, the corporation being absolutely without power to increase its stock above a certain limit, the acquiescence of the shareholder can neither give it validity, nor bind him or the corporation. ‘A distinction must be made between shares which the company had no power to issue and shares which the company had power to issue, although not in the manner in which, or upon the terms upon which, they have been issued. The holders of shares which the company has no power to issue in truth had nothing at all, and are not contributors. ’ ’ ’ The language of our Constitution above quoted shows that the sixty days’ notice therein required in pursuance of law was in order that the consent of a majority in value of the stockholders might be obtained to any proposed increase of the stock. The agreed statement of facts warrants the conclusion that the majority in value of the stockholders, indeed all who claimed to have any interest in the stock of the bank, were present at the meeting when, on the 3d day of February, 1908, the stock was increased. The uncontradicted evidence shows that there was a bona fide intention and effort upon the part of all the stockholders of the bank to increase the capital stock. The increase was all subscribed for, and the appellant received her certificate for the amount for which she subscribed and held the same for some time before a receiver was appointed. The facts bring the case well within the doctrine of the Upton cases, announced by the Supreme Court of the United States in Sanger v. Upton, 91 U. S. 56; Webster v. Upton, 91 U. S. 65; Chubb v. Upton, 95 U. S. 665; Pullman v. Upton, 96 U. S. 328. These cases are cited by Purdy’s Beach on Private Corporations, p. 397, where the doctrine of those cases is crystallized as follows: “Where the power to increase its capital stock exists and is exercised, the corporator’s failure to perform some act devolved upon it in connection therewith, such as recording and publishing its action, constitutes an irregularity or neglect of duty of which the State only can complain or take advantage in a direct proceeding against the corporation, but stockholders who have accepted portions of such increased stock are estopped from denying the validity of the increase upon any irregularity or neglect.” See also cases cited in note 1, Cook on Corporations, p. 550; Thompson on Corporations, § 3635, and authorities cited in note. Mr. Beach says: “The validity of irregularly issued stock is based upon its analogy to the case of a de facto corporation.” Purdy’s Beach on Corporations, § 275. In the case of Whipple v. Tuxworth, 81 Ark. 391, at page 400, Judge Battle, speaking for the court, quotes the following from Mr. Clark on Corporations: “Most of the courts hold that there is a corporation de facto whenever there is a valid law under which a particular kind of a corporation may lawfully be organized, and persons having the required qualifications undertake, in good faith, to organize such a corporation thereunder, comply at least colorably with the law, and afterwards assume to act as a corporation, though particular provisions of the law are not complied with. -And they hold that it is altogether immaterial in such cases whether compliance with the particular provisions was intended by the Legislature as a condition precedent to the formation of the corporation or not.” In Jones v. Dodge, 97 Ark. 249, we held (quoting syllabus): “ One who contracts with an acting corporation can not defend himself against a claim on such contract by alleging the irregularity of its organization.” The same rule would apply as to irregularities in the authorized increase of capital stock. The appellant purchased and paid for shares of stock in the Saline County Bank. She obtained what she contracted for. There is no fraud shown to have been perpetrated upon her by the bank through its officers, and the bank does not owe her anything. Therefore the estate of John L. Hughes, deceased, is not liable because of any failure upon his part as president of the bank to file the annual certificate required by section 848 of Kirby’s Digest. The holding of the circuit court to this effect was correct, and the judgment is affirmed.