Court Opinion

ID: 6421590
Source: CourtListenerOpinion
Date Created: 2022-06-25 12:00:15.907836+00
Date Added: 2024-06-11T15:51:48.147935
License: Public Domain

C. Allen, J.
The issue of special stock was invalid. This is a peculiar kind of stock, now distinctly provided for by statute, *9but unknown to the general laws of the Commonwealth until 1855. Its characteristics are, that it is limited in amount to two fifths of the actual capital; it is subject to redemption by ■ the corporation at par after a fixed time, to be expressed in the certificates; the corporation is bound to pay a fixed half-yearly sum, or dividend upon it, as a debt; the holders of it are in no event liable for the debts of the corporation beyond their stock; and the issue of special stock makes all the general stockholders liable for all debts and contracts of the corporation until the special stock is fully redeemed. Sts. 1855, c. 290; 1870, c. 224, §§ 25, 39, cl. 4. Pub. Sts. c. 106, §§ 42, 61, cl. 3. Williams v. Parker, 136 Mass. 204, 207.
Preferred stock, as usually understood, is something quite different from this. Special statutes have from time to time authorized particular corporations to issue preferred stock, with various special provisions; as, for example, Sts. 1853, c. 1; 1855, c. 143; 1877, <r. 170; 1878, c. 138 ; 1882, e. 177. But authority to issue preferred stock is not conferred in express terms by any general statutes. Corporations have sometimes, no doubt, at the outset of their organization, assumed the authority to divide their capital stock into two classes, preferred and common; and when each stockholder subscribes for and takes his shares of common stock with full knowledge and consent, there is perhaps no legal objection to this course. The question is a different one, whether a corporation, with an existing capital stock all subscribed for and taken, can increase its capital by the issue of further shares which shall be preferred, and if so under what circumstances this may be done, and whether by a mere majority or only by a unanimous vote of the existing stockholders.
This question need not be considered here; though it has arisen elsewhere. Kent v. Quicksilver Mining Co. 78 N. Y. 159. It is sufficient for the present purpose to call attention to the marked distinction between preferred stock as usually understood, and special stock as authorized by legislation in this Commonwealth. Special stock could only be issued by the Boston Machine Company by a vote of three fourths of its general stockholders, at a meeting duly called for the purpose. St. 1870, c. 224, § 25. The meeting of December 30, 1880, at which the *10original vote to issue special stock was passed, was called to consider whether the corporation would issue $100,000 of preferred stock. This call did not authorize a vote to issue special stock, and the vote was accordingly invalid. See People's Ins. Co. v. Westcott, 14 Gray, 440; Wiggin v. Lowell Freewill Baptist Church, 8 Met. 801, 310; In re Bridport Old Brewery Co. L. R 2 Ch. 191.
A new meeting was called in due form for June 8, 1882, at an adjournment of which a vote was passed for the issue of special stock; but the difficulty with this meeting is, that it does not appear by the record that three fourths of the general stockholders voted for such issue, although more than that number were present at the meeting. It is essential to the validity of the vote that this fact should appear of record. It is contended by the defendant, that the presumption is that all the shareholders who were present voted for the issue of the special stock, since nothing appears to the contrary. But in several cases quite similar to this, so far as the principle is concerned, it has been held otherwise. Morrison v. Lawrence, 98 Mass. 219. Andrews v. Boylston, 110 Mass. 214. Judd v. Thompson, 125 Mass. 553. , It was required by statute that this corporation should have a clerk, who should be sworn, and who should record all votes in a book to be kept for that purpose. St. 1870, c. 224, §§ 15, 18. Pub. Sts. c. 106, §§ 23, 26. No authority has been cited to us, in this State or elsewhere, supporting the view of the defendant. The strongest case that we have seen, looking in that direction, Commonwealth v. Woelper, 3 S. & R. 29, is quite distinguishable, both on the ground assigned by Chief Justice Tilghman, that inasmuch as no meeting for the transaction of ordinary business could be held without the presence of two thirds of the ministers, elders, and church-wardens, who constituted the corporation, and inasmuch as the custom had been not to mention how many attended, the record that, after due invitation, “ the ministers, elders, and church-wardens met ” was sufficient to show that two thirds of them met; and especially on the ground assigned by Gibson, J., who presided at the trial, that it was not open to the defendant, under the particular circumstances of that case, to take the objection. In the present case, the record of the vote is entirely consistent with the construction that the vote was passed merely *11by a majority of those who attended the meeting. The vote at the third meeting, at which the subject of special stock was acted on, is open to the same objection as that at the second meeting.
There was no other action at any of the meetings of the corporation which could have the effect to make the special stock valid by way of ratification. There is indeed no reference to special stock in the reports of the treasurer, but only to “ capital stock ” and “ preferred stock.” It is difficult to see how any action at a corporate meeting can have a greater effect by way of ratification than a direct vote passed at such meeting would have; and a direct vote at any such other meeting than those hereinbefore referred to would have been invalid, for want of due notice that the subject would be acted on, as well as for want of a record showing a vote of three fourths of the stockholders.
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. Allen v. Herrick, 15 Gray, 274, 284. It was not bound by any estoppel. In all the cases which have come under our observation where one has been held to be deemed a stockholder by estoppel, there has been a legal creation of the capital stock. Such was the case in Turnbull v. Payson, 95 U. S. 418. But where the issue of the shares is illegal, where no sufficient steps have been taken to authorize the creation of the capital stock, where a person has acted and been treated as a stockholder in respect of shares which the company had no power to issue, and where the shares cannot legally exist, the person taking them cannot, by estoppel or otherwise, become a member in respect to them. Bindley on Part. 134. Moreover, in the case before us, the defendant corporation has no equity to insist that .the plaintiff corporation should be treated as a stockholder. It failed to issue the number of shares contemplated by its vote. It has been in no respect misled by any act of the plaintiffs. It has not changed its position for the worse. It has had the plaintiff’s money, and has simply paid what is equivalent to interest upon it. No rights of third parties have intervened. The consideration upon which the plaintiff parted with *12its money has failed. The defendant corporation issued special stock, which was at the time supposed by both parties to be valid, but which was invalid. Under such circumstances, an action lies to recover back the money. Dill v. Wareham, 7 Met. 438. Earle v. Bickford, 6 Allen, 549.
The election by the plaintiff to rescind the contract was exercised within a reasonable time. Formal notice was given on April 28, 1883, or about twenty-seven months after the first issue of special stock to the plaintiff. This special stock might have been made good, so that the plaintiff would be content or be bound to keep it. The defendant twice endeavored without success to effect this result. It has suffered nothing from the delay. The notice of rescission was sufficient in form, and the offer to return all considerations received was also sufficient. Indeed, since the money received by the plaintiff as interest or dividends was not equal to the amount of money which the plaintiff was and now is entitled to receive, no offer to return the same was necessary. Montgomery v. Pickering, 116 Mass. 227, 231. Judgment affirmed.