Court Opinion

ID: 9648397
Source: CourtListenerOpinion
Date Created: 2023-08-23 14:19:13.597713+00
Date Added: 2024-06-11T18:12:00.255386
License: Public Domain

George Rose Smith, Justice. On June 30, 1969, the appellant, Systematics, Inc., a comparatively young company supplying services based upon data processing, issued to the appellee, an employee, 15,000 shares of Systemati.cs stock at a price of ten cents a share. The stock was issued pursuant to a restrictive agreement by which Mitchell was required to offer to resell the stock to Systematics, at the same price, if he were discharged for cause. About eleven months later Systematics discharged Mitchell for cause, but he refused to resell the stock to the company at the agreed price. Systematics brought this suit for specific performance of the contract. The chancellor found that the price of ten cents a share was not “a fair price” within the terms of the controlling statute. Instead, the chancellor found the fair market value of the stock to be fifty cents a share. This appeal is from a decree giving Systematics the option of repurchasing the stock at a price of fifty cents a share. The one issue argued here is the validity of the restriction upon Mitchell’s right to sell his stock to third persons. The exact language of both the contract and the statute must be considered. The contract, which was executed by the company with a dozen of its employees, contained the following provisions: ”2. A Stockholder shall not have the right to transfer, assign, pledge, encumber or otherwise dispose of the shares subject hereto. "3. On June 30, 1970, ten (10%) percent of the stock originally subject hereto owned by each Stockholder shall be relieved of and released from the restrictions imposed herein. A like number of shares shall be relieved of and released from the restrictions imposed herein on June 30 of each succeeding year until June 30, 1977, at which time all of the remaining stock shall be relieved of and released from such restrictions. “4. In the event of the termination of a Stockholder’s employment with the Corporation, except by reason of death or mental or physical disability, then the Stockholder shall offer all of his shares of stock then subject hereto for sale to the Corporation at a price of $.10 per share. The Corporation shall exercise its option to purchase by paying the purchase price to such Stockholder in cash within thirty (30) days after such offer. If such option is not exercised by the Corporation, then the Stockholder’s stock shall remain subject to all the terms and provisions hereof. These provisions shall not apply when a Stockholder’s employment is terminated by action of the Corporation without cause [in which event the stock is released from the restrictions].” Systematics argues, in effect, that despite the statutory reference to “a fair price,” the parties were free to agree upon any price that was fair in the light of the agreement as á whole, without regard to the fair market value of the stock at the time of the exercise of the company’s option to repurchase. To support its argument Systematics cites cases from other jurisdictions sustaining the validity of agreements such as this one. It is conceded, however, that all the cases cited were decided without reference to, and in the absence of, pertinent statutes. The relevant statute is part of our comprehensive Business Corporation Act, adopted in 1965, and reads as follows: "A corporation may provide, in respect to any of its shares which are to be issued, that the future transfer (whether inter vivos, by inheritance or testamentary gift), hypothecation or other disposition of such shares shall be subject to restrictions (including purchase options) that do not unreasonably restrain alienation — which restrictions, among other things, may require a prior offering to the corporation or to one or more of its shareholders, at a fair price, before the shares may be otherwise transferred or hypothecated.” Ark. Stat. Ann. § 64-211 (Repl. 1966). The appended Committee Note to this section is especially enlightening with respect to the legislative intent: “The above is original draftmanship. Lawyers are often asked to prepare by-law provisions creating these restrictions; and it seems that there might as well be some statutory authority therefor. This section permits such restrictions on transfer as do not ‘unreasonably restrain alienation.’ This leaves considerable room for interpretation; but the committee did not want to attempt to spell out in detail what restrictions would unreasonably restrain alienation. As to such restrictions see Fletcher, Cyclopedia of Corporations, Permanent Edition, Section 5456. Vol. 12, Page 309; also Sections 5457, 5458.” The statute and the committee’s note, when read together, make it clear that the draftsmen of the act had at least two points in mind: First, such restrictions upon the transfer of stock must not unreasonably restrain alienation. That such an unreasonable restraint may be invalid is stated in Fletcher’s Cylopedia, § 5456, and in Ward v. City Drug Co., 235 Ark. 767, 362 S.W. 2d 27 (1962), also cited by the committee. Secondly, the restriction must provide a fair price for the repurchase of the stock. That point is discussed by Fletcher in § 5457, cited by the committee: “The determination of the price to be paid on the transfer of restricted shares is one of the most troublesome questions. . . . The methods most often used in the valuation of restricted shares are: (1) flat price; (2) book value; (3) a formula expressed as a multiple of average net earnings; (4) par value of shares.” The committee obviously decided to reject the “flat price” and the “par value” methods of price-fixing, because “a fair price” was selected as the approved standard. Moreover, in a law review article discussing the proposed corporation code before its enactment, the author had this to say, almost as if the case at bar had been before him: “A leading New York case, Allen v. Biltmore Tissue Corp., 2 N.Y. 2d 534, 141 N.E. 2d 812 (1957), held that a first option restriction is valid even though the price to be paid by the corporation exercising the option is fixed at the price the selling shareholder originally paid for his shares [the exact fact situation now before us]. Query whether this would be ‘a fair price’ within the meaning of the Arkansas statute if the shares have appreciated markedly in value. In order to be certain that first option provisions are not declared invalid because the price at which the shares are to be transferred is unfair, some provision may have to be made for adjusting the price from time to time as the shares change in value.” O’Neal, The Small Corporation and the Proposed Arkansas Corporation Code, 17 Ark. L. Rev. 356, 360 (1963). We are convinced by our study of the statute that (a) the restriction agreed upon must not unreasonably restrain alienation of the stock, and (b) the price agreed upon must be fair at the time of the repurchase, for the statute explicitly refers to “the future transfer” of the stock. Hence a price that was fair when the contract was executed may not necessarily be fair some years later. In our opinion the restrictive agreement now before us runs counter to both requirements of the statute. That is: First, the restriction unreasonably restrains alienation.. Counsel for Systematics argue that the corporation was required to repurchase Mitchell’s stock when he was discharged, but we do not so read the contract. Paragraph 4, governing the matter of repurchase, vests the decision to repurchase or not to repurchase in the corporation, with this added language: “If such option is not exercised by the Corporation, then the Stockholder’s stock shall remain subject to all the terms and provisions hereof.” We see no reasonable interpretation of that language except to take it to mean that if the company decides not to repurchase the stock at ten cents a share, the stockholder still cannot sell the stock to anyone else until the restrictions ultimately expire under Paragraph 3 of the agreement. Thus the stockholder may be compelled for years to retain an investment in Systematics even though he has been discharged and has no desire to be connected with the company. We can only regard such a restriction as an unreasonable restraint upon the alienability of the stock. Secondly, the price is not fair with respect to future sales of the stock, which is what the statute is talking about. The chancellor found the fair value of the stock at the time of trial to be fifty cents a share. That finding is not questioned by Systematics, which elected not to abstract the proof with respect to market value (its position being that that issue is not involved here). It is plain enough that a resale price of only 20% of the market value of the stock is not a fair price and for that reason tends to restrain the alienability of the property. Thus the second requirement of the statute, that the price be fair, is also wanting in the contract under consideration. In affirming the decree we do not imply that the chancellor was right in fixing the fair market price at which Systematics may repurchase the stock. As we pointed out in Rector-Phillips-Morse v. Vroman, 253 Ark. 750, 489 S.W. 2d 1 (1973), it is not the province of the courts to make contracts for the parties. The decree should have gone no farther than to declare the contractual option to be invalid, leaving the parties to their own devices. Mitchell, however, has not cross-appealed from the decree and is accordingly bound to abide by its provisions if Systematics elects to exercise the option recognized by the chancellor’s decree. Affirmed. Harris, C. J., and Fogleman, J., dissent.