Court Opinion

ID: 3973473
Source: CourtListenerOpinion
Date Created: 2016-07-06 10:31:45.29503+00
Date Added: 2024-06-11T13:53:29.380439
License: Public Domain

I am unable to assent to the affirmance of this case and respectfully dissent from the action of the majority of this court in doing so. My learned Brethren are very much at variance in giving the grounds for affirmance. One holds when the notes were executed the subscription contract or agreement was merged in the notes and that the evidence shows that they were executed upon an agreement to issue stock therefor. The other holds the subscription contract was accepted by the corporation when organized, and in effect that appellee had elected the alternative provision in his proposition to pay for the stock in securities satisfactory to the insurance department, and hence a payment in securities was made and therefore void. I cannot concur with either opinion filed. The subscription was made and delivered to the agents of appellee before the company was organized, and he executed the four notes, one for $687.50 and the three for $500 each, payable to his agents, the Organization Company, and secured these notes by a deed of trust on 2 1/2 sections of land. All these instruments were in the hands of his agents before the incorporation of the company. The company was incorporated March 23, 1911, and granted a permit to do business in Texas in June, 1911. The Organization Company, the appellee's agent, indorsed the notes to appellant and turned over to it the subscription contract. After the company was incorporated and before the renewal of the three $500 notes, *Page 783 
with the interest added in, the appellee paid off to appellant the $687.50 note before he received the certificate of stock. Thereafter he renewed the three $500 notes and executed a deed of trust on the same land to secure them. These last notes and the deed of trust are the instruments sought to be canceled. These last notes are dated December 1, 1912, while the original notes are dated December 1, 1910, and the original deed of trust is dated January 13, 1911.
The appellee testified that the old notes were given "for stock in the Commonwealth Company." "These new notes which I executed are for the same consideration." "These three notes for the sum of $562.50 each, executed on December 1, 1912, were renewal notes of old ones." I find no evidence that there was a promise that the stock would be issued to him when the company organized. True, while testifying, he stated that he paid $2,500 for the certificate which he then held in his hand, and that he got nothing else for his money except the certificate; that he paid $1,000 in money and the three notes sought to be canceled, but he did not testify, as I construe the testimony, that the corporation promised to issue stock in payment or in consideration of those notes. The stock introduced in evidence was dated July 10, 1912, but in fact was not delivered to him until after he had paid the first note falling due and the renewal of the old notes in December, 1912. I am unable to find from this testimony anything warranting the inference that there was stock delivered to him prior to the one shown in evidence. There is some testimony that an agreement was prepared for him to sign, agreeing to transfer his stock in this company to another corporation, which was delivered to him, and which he refused to sign and return to the company. I do not interpret it as testimony showing that any stock was issued to him and delivered to him. The appellee's testimony on that point shows that he does not know what it really was, except that they sought to get a transfer of his stock in appellant to some other company.
I believe that the original contract of subscription, the original notes, and the deed of trust given to secure those notes, must be read together as part of his proposition to the proposed corporation to take stock in the company, when organized. When so read, his proposition to the corporation is, if it accepted his proposition to pay for 62 1/2 shares of stock at $10 per share, $30 per share to the surplus, that he would pay this sum of money at a time certain; in other words, he agreed to pay his subscription by installments. This was not a promise to pay upon the issue of stock to him, but a promise to pay for the stock, and clearly implied that he would pay before issuance under the contract. Even without any statutory or constitutional inhibition, he could not have compelled the issuance of the stock before he paid for it. California Hotel Co. v. Callender, 94 Cal. 120, 29 P. 859, 28 Am. St. Rep. 99. The contract being valid furnished a sufficient consideration for the new notes, and they were not therefore void. I quote from Ruling Case Law, vol. 7, "Corporations," § 193:
"A subscription by a number of persons to the stock of a corporation to be thereafter formed by them has in law a double character: First, it is a contract between the subscribers themselves to become stockholders without further act on their part, immediately upon the formation of a corporation. As such, the contract is binding and irrevocable from the date of the subscription, at least in the absence of fraud or mistake, unless canceled by consent of all the subscribers before acceptance by the corporation. Second, it is also in the nature of a continuing offer to the proposed corporation, which upon acceptance by it, after its formation, becomes as to each subscriber a contract between him and the corporation. The uniform postulate of all the adjudicated cases is that any subscription to stock in a corporation to be thereafter formed is not and cannot be from the very nature of the transaction, a complete contract — it is an open proposition — until the actual formation of the corporation; it is merely a continuing offer to take stock upon the condition that the corporation be called into existence and a fulfillment of which condition works at once without further act on the part of the subscriber an implied acceptance and concludes a binding contract. It is not essential to constitute one a subscriber to the capital stock of a corporation that he should have subscribed to the stock books after articles of incorporation have been perfected and filed. If there is a preliminary subscription and the corporation is thereafter formed as contemplated within a reasonable time, the subscribers become stockholders without any further act. Again, notice of acceptance by a corporation of a subscription for its benefit made before it was organized is not necessary. Such acceptance may be inferred from the conduct of the corporation retaining the subscription paper in its possession and expending large sums of money on the faith of it. * * * A promoter of a proposed corporation, who solicits and procures stock subscriptions, is the agent of the body of the subscribers to hold the subscriptions until the corporation is formed and then turn them over to it without any further act of delivery on the part of the subscribers. Hence a delivery of a subscription to such promoter is a complete delivery so that it becomes eo instante a binding contract as between the subscribers."
This, I believe to be the rule established in Texas. Belton Compress Co. v. Saunders, 70 Tex. 699, 6 S.W. 134; Steely v. Texas Improvement Co., 55 Tex. Civ. App. 463, 119 S.W. 319, 322, 323; Mathis v. Pridham,1 Tex. Civ. App. 58, 20 S.W. 1015; Bivins v. Panhandle Packing Co., 140 S.W. 523.
The clause "pay in money or securities satisfactory to the insurance department" does not, in my judgment, render the proposition void; but if it, standing alone, did so, then before appellant accepted the proposition appellee had changed that part of it by his note to pay in cash upon a day certain and at all events. It was not a promise to pay if the stock was issued, and no such inference is legally inferable. The company could not issue the stock, and, if it afterwards did so, it was an ultra vires act, and the certificate *Page 784 
of stock was void and not an obligation upon the company for its par value. This stock could have been called in and canceled at any time by the company, or the Attorney General of the state could have instituted proceedings to that end. Articles 1147, 1148. I cannot see how this would render a valid note invalid. The purpose of the Constitution and law was to prevent the issuance of watered stock, not to declare illegal a contract to pay for stock. The contract did not require its issuance before paid for, and the subscription was not therefore illegal. Because the corporation, after accepting the note, did an illegal thing, this would not render the notes illegal when the illegal thing was not the consideration for the note. Contracts of this kind, as well as this very contract, have been upheld as legal by the courts, and I see no reason for holding differently in this case.
Considering the proposition, notes, and deed of trust as one instrument, it was unambiguous in that it was a promise to pay cash for the stock. The rule is so well recognized by all the courts that an agreement to pay for stock by subscribers may be enforced after organization of the proposed corporation, that I deem it unnecessary to cite further authorities. The appellee's interpretation that the certificate was to be issued to him in consideration of his note and subscription in my judgment is not warranted by his written contract and proposition.
I am also unable to agree on the proposition that the facts in this case do not show a payment for the stock before its issuance. I believe the facts show that it was paid for before there was any stock delivered to Hollifield. The subscription contract divides the amount subscribed into stock, the shares of which were to be of the par value of $10; the surplus should be $30. The expenses of organization were deducted from the $2,500 paid by appellee to his agent at the time of subscribing. He expressly stipulates in his contract that the amounts subscribed should go to capital stock and surplus. He, himself, made the division. He stated that his shares should be $10 each, and that his surplus should be $30 each, and, having made the division himself, he should not now be heard to say that he paid $2,500 for the shares. The contract was that he agreed to pay when the capital stock had been subscribed in good faith to the amount of $200,000 of capital in the aggregate when paid. It makes no difference whether the value was placed on then at $1 or $10 per share; the capital stock was $200,000. And the surplus was to be $30 per share, which would have been $600,000 in addition to the capital stock. This, I believe, to be the interpretation of this contract. The charter of the corporation provides that its shares shall be divided into 30,000 shares at $10 each, and the stock issued in this case shows that it was issued at $10 per share — 62 1/2 shares at $10 per share. It occurs to me that there must be some confusion with reference to what constitutes capital stock, or the shares of stock owned by the individual. Cook on Corporations, vol. 1, § 8, defines "capital stock" as:
"The sum fixed by corporate charter as the amount paid or to be paid in by the stockholders for the prosecution of the business of the corporation and for the benefit of corporate creditors. The capital stock is to be clearly distinguished from the amount of property possessed by the corporation."
Again, he says in the same section:
"The capital stock of a corporation remains fixed, although the actual property of the corporation may fluctuate widely in value and may be diminished by losses or increased by gains. The term `stock' has been used at times to indicate the same as capital stock. Generally, however, it means shares of stock and in this sense it is used in this treatise."
The United States Supreme Court and the federal courts, in cases arising on the question of taxation with reference to stock and surplus as to whether or not surplus fell under the term stock, have drawn the distinction between "stock" and "surplus," and hold that the surplus is subject to the taxation. In Leather Manufacturers' Bank v. Treat, 128 Fed. page 262, 62 C.C.A. 644, in discussing this question it is said:
"It is quite usual, upon the organization of financial corporations, for the stockholders to contribute, besides the share of capital, a fund which is known as `surplus.' It is also quite usual for the directors or managers of these institutions to set apart and to add to this fund from time to time some part of the accumulated profits of the business in excess of dividend requirements. The fund produced in either of these ways is what is known as `surplus.'" Central Trust Company of New York v. Treat (C. C.) 171 F. 301.
The ownership of this large surplus by the corporation, available to make good losses in any of its enterprises, would naturally increase its credit generally.
The Supreme Court of the United States, in Bank of Commerce v. State of Tennessee, 161 U.S. 134, 16 S. Ct. 456, 40 L.Ed. page 645, in discussing the taxes which may be collected against a banking corporation, uses this language:
"The surplus belonging to this bank is `corporate property,' and is distinct from the capital stock in the hands of the corporation. The exemption, in terms, is upon the payment of an annual tax of one-half of one per cent. upon each share of the capital stock, which shall be in lieu of all other taxes. * * * Recognizing, as we do, that there is a different property in that which is described as capital stock from that which is described as corporate property other than capital stock, and remembering the necessity there is for a clear expression of the intention to exempt before the exemption will be granted, we must hold that the surplus has not been granted exemption by the clause contained in the charter under discussion. The very name of surplus implies a difference. There is capital stock and there is a surplus over, above, and beyond the capital stock, which divided among stockholders." *Page 785 
Ruling Case Law, vol. 7, in section 165, defines "capital stock," and in section 160 says:
"The tangible property of a corporation and the shares of stock therein are separate and distinct kinds of property and belong to different owners. The first being the property of the artificial person, the corporation; the latter the property of the individual owner."
The Constitution in this state forbids the Issuance of "stock" without money paid. Until issued, the capital stock is in the corporation. After issued, when delivered, it becomes the property of the individual, and not before. It is not an obligation on the part of the corporation to pay to the individual the amount represented by the shares. Stock issued and delivered as fully paid up, if in the hands of an innocent third party, could be enforced against the corporation. Hence the evident purpose of the framers of the Constitution and of the law was to prohibit the issuance and delivery of stock as fully paid up. The capital stock in appellant company could be issued to the amount of $300,000 of the par value of $10. It will not De contended, we apprehend, that it could have issued stock for $300,000 plus the surplus. The obligation on the part of the corporation was only for $10 per share, and there was no other outstanding obligation against it represented by that certificate, and this was the obligation which is prohibited from being issued by the Constitution. There is no provision in the law or Constitution that prohibits an individual stockholder from contributing to the corporation a sum of money independent of the shares of stock for the purpose of making the assets of the corporation more valuable. Such an obligation or such a note could not violate the law or Constitution, for the reason that the public, in dealing with it, had the assurance, not only that the stock is paid, but that, in addition thereto, there is $30 per share over and above the stock, and public policy would not prohibit, it occurs to me, a corporation from making its stock more valuable and its customers better secured by this addition than it otherwise would be by the mere payment of the par value of the stock. We apprehend that it will not be contended that under articles 1198, 1208, and 1210, the shareholder, in case a creditor should desire to collect a debt against the corporation, could collect from the shareholder more than the face value or par value of his stock; or, in case of insolvency, that he would be assessed for more than his pro rata part as shown by the face or par value of his stock. I believe that when this note was paid, and it having been paid before the issuance or delivery of the stock to the appellee, that the par value of the stock was paid for, and that the Constitution and law of Texas were satisfied, and that he was entitled to his company did not represent to the world that it was fully paid up when it was not, for in fact it received the par value of the stock and had the money on hand. The other notes for $1,500, with the accrued interest, was not for stock, but it was for something over and above the stock which he had agreed to pay as surplus, as was shown by his written proposition, and it was not in violation of the Constitution and laws for him to so execute such notes. It made the corpus of the corporation more valuable and should be commended, rather than condemned. I therefore am of the opinion that this case should have been reversed.