Court Opinion

ID: 6554066
Source: CourtListenerOpinion
Date Created: 2022-07-20 01:21:35.699687+00
Date Added: 2024-06-11T15:56:11.446202
License: Public Domain

Thornton, J., dissenting.
I dissent. I am of opinion that there was evidence sufficient to sustain the finding *391of the court that it was agreed among the stockholders that one hundred thousand shares of stock in the new corporation should be divided among the stockholders in the Head Center Consolidated Mining Company as they held shares in the Head Center Company.
I adopt the opinion of the commissioners formerly rendered in this case as a correct exposition of the law applicable to it.
The following is the opinion of Department Two, rendered on the 18th of February, 1889, referred to and adopted by Mr. Justice Thornton in his preceding dissenting opinion: —
Foote, C.
The plaintiffs claim to be the owners and holders of 63,138 shares of the stock of the Head Center Consolidated Mining corporation, and bring this action to compel the defendants to transfer, deliver, and issue to them 39,115 shares of stock of the Head Center and Tranquility Mining Company, and to restrain the defendants from representing, voting, or dealing in any way with these latter shares of stock, of which plaintiffs claim to be the owners.
The plaintiffs claim to derive their title to the last mentioned by reason of their ownership of the first mentioned shares of stock.
The plaintiffs had judgment, and from that and an order denying a new trial, the defendants have appealed. The grounds of the appeal, concisely stated, are that the judgment is unsupported by the findings and any admissions in the pleadings, and that the findings are unsupported by the evidence.
According to the evidence in the record, some time in the summer of the year 1882, two mining companies were in possession of adjoining mining claims in the Tombstone district of the territory of Arizona. One of them, called the Tranquility Mining Company, was incorporated under the laws of New Jersey; the other, *392the Head Center Consolidated Mining Company, was a California corporation.
Litigation of a vexatious character had sprung up between these two companies. For the purpose of discontinuing this strife, and furthering their mutual interests, an arrangement was proposed to be effected upon the part of the stockholders of both companies, by common consent, by which the formation of a new corporation was to be had, to which should be deeded all the property of both the old companies, in consideration of the stock of the new company.
After various negotiations looking to this end, the Head Center and Tranquility Mining Company was organized on the fjrst day of December, A. D. 1882, its capital stock being fixed at two million dollars, and the number of shares at two hundred thousand. This step was taken upon legal advice that it was the most feasible method by which the two companies could be consolidated, one being a New Jersey corporation, and not subject to the provisions of the Civil Code of California with reference to the consolidation of such corporations. The subscribers to the stock of the new company, and who constituted the board of directors thereof, were F. A. Benjamin, T. E. Jewell, A. W. Foster, William Kohl, P. N. Lilienthal, J. N. Gitchell, and J. W. Pew, who each nominally subscribed for five shares of stock. It seems to have been agreed upon all sides by the stockholders of the two original companies that an equal voice in the .management of the new company should be accorded to each set of stockholders.
At the first two elections of directors three of them were selected to represent the stockholders of each of the old companies respectively, and a seventh person was elected as being impartial. On the 18th of December, 1882, the board of directors of the new company unanimously adopted a resolution to the effect that the proposition of Messrs. Jewell and Benjamin to sell, convey, *393or cause to be conveyed to that company the mining claims and grounds known as the Head Center and Yellow Jacket claims in the Tombstone mining district of Cochise County, Arizona, in full payment and satisfaction of the sum of five dollars, and one hundred thousand shares of the capital stock of that corporation, and the Tranquility mining claim of the same district, county, and territory, with its appurtenances, for the like sum of money and the like number of shares of the capital stock aforesaid, should be accepted. The president and secretary of that corporation being thereby directed to transfer, on the basis proposed, the two hundred thousand shares of its consolidated stock to Benjamin and Jewell, or their order, on the books of the corporation, on the reception by the company of the conveyance of the property of the two old corporations.
Afterward, on the 4th of January, 1883, the directors of the Head Center Consolidated Company passed certain resolutions, with a view to carry out the arrangement above mentioned.
These resolutions recognize the existing status of affairs as heretofore mentioned, and for the purpose of carrying out the compromise and consolidation which had been agreed upon, direct the president and secretary of the corporation to execute a conveyance of its mining ground, and to receive in consideration therefor five dollars in money and one hundred thousand shares of the capital stock of the new corporation.
On the 25th of the same month, at an annual meeting of the stockholders of the Head Center Consolidated Company, at which 160,165 shares of the 164,211 outstanding shares of the stock of the company were represented, the action of the directors in the matter of the consolidation was ratified, and on the 27th of February following the deed was executed by the officers of that corporation.
On that day, also, Mr. Benjamin, to whom the secre*394tary of the new company had been directed to issue the 100,000 shares of stock in the new corporation for - the Head Center property, directed Mr. Pew, who was that secretary, to issue 99,980 shares of the stock to himself (Pew) as trustee, and the remaining porton of it in pieces of five shares each to several of the directors; and Jewell, to whom it had been ordered that the 100,000 shares of the stock of the Tranquility property was to be issued, directed that 99,975 shares of it be issued to William Kohl, as trustee, and the rest to the remainder of the directors, which was done.
The stock thus issued was deposited in the Anglo-Californian Bank, to be held subject to the joint order of Kohl and Foster, under a stock-pooling arrangement, to which the stockholders of both the original companies were parties.
There does not seem to have been any question as to the right of distribution among the stockholders of the old Tranquility Company of their pro rata share of the new stock, but when Mr. Kohl, the trustee for the Head Center stockholders, demanded that their stock be distributed to them in like manner, the request was refused, on the ground that the law did not authorize such a distribution, as it vested the title and right to the stock in the old corporation, as its capital stock, by reason of the fact that the stock was a mere substitution for the mining ground which had belonged to that company, and it was not legal that the capital stock of the corporation should be divided out among the stockholders.
And here, in passing, it may be remarked that no objection seems to have been made in any quarter to such a dividing out pro rata to the stockholders of the Tranquility Company of the shares of stock which fell under the new arrangement to the Tranquility in lieu of its mining ground, etc. And it also appears that no difference existed under the arrangement for consolidation, in the agreement and understanding, as it affected *395the Tranquility or the Head Center Consolidated Company and their several stockholders. If this arrangement was, without any objection, carried out as to the one, that would seem to be a strong circumstance going to show that the same understanding must have existed on the part of the stockholders and all parties concerned, with reference to what was to be done with the stock of the other old company.
Upon the other hand, the defendants claim that the oral testimony establishes no such common understanding, and that it and the documentary proof indicates very clearly that the real transaction was merely a sale of its property by the Head Center Consolidated Mining Company, in consideration of one hundred thousand shares of the capital stock of the Head Center and Tranquility Company (the new company); that the transaction as carried out was a corporate transaction, rather than one on the part of the body of the stockholders of the Head Center Company.
But the evidence indicates that when the stock was issued it was not to the corporations, but to Kohl and Pew, trustees, and was to remain in a pool for a certain purpose, for a certain specified time, when it was to be divided out among the stockholders, in pursuance of the original plan and agreement.
This is abundantly shown, to quote from the opinion of the judge below, 'who heard the witnesses testify, and saw them face to face, by “the positive testimony of the plaintiffs, the negative corroboration of that testimony by defendants, borne out by the recorded acts of all parties.” All of which makes it plain “that the arrangement, as planned and executed, was a consolidation of the interests of the two sets of old stockholders in the new Head Center and Tranquility companies.” This conclusion is consistent with all the testimony, oral and written, and is in perfect harmony with the conduct of all parties, which is convincing evidence of “its correct*396ness, especially in view of the further circumstances that what is claimed to have been agreed on is just what would have been the best thing for all interests to have been done, if the old corporations had both been domestic or state corporations.
If then, as we conclude it to have been, the arrangement was “the act of the body of the Head Center stockholders,” and the stock was issued to Pew as their trustee merely, is the transaction one forbidden by section 309 of the Civil Code, or by the general principles of equity which govern such transactions ?
If the consummation of the agreement would result in fraud of complaining creditors’ rights, or was opposed to the interests of the stockholders, it is plain that under the decision of the appellate court in Martin v. Zellerbach, 38 Cal. 300, in giving construction to a similar statute, such a division of stock among stockholders would be unlawful. But, as appears to us, this arrangement was for the benefit and interest of all parties, both the creditors to whom not a large sum was due, which was paid before this application to divide the stock was made, and to the stockholders themselves, who thereby, as it seems to us, would have occupied relatively the same position in the new company which they held in the old. The prohibition, as we take it, contained in the section of the Civil Code, supra, “is directed against the trustees, and seems designed to protect creditors as such, and also to protect the stockholders against their mismanagement in distributing capital stock in the form of dividends, with a view to holding out the idea that the corporation is more prosperous than it is, for the purpose of promoting some unlawful object. If all parties in interest are secured from injury, and the purpose is a lawful one, the object of the provision would seem to be accomplished, and there would be no one entitled to complain. Such a transaction was regarded as lawful in *397Treadwell v. Salisbury Manufacturing Company, 7 Gray, 393.” (Martin v. Zellerbach, supra.)
Here the debts are all paid before the stock is asked to be delivered, the parties asking it are those who had the stock in one of the original companies, whose property is now owned by the new company, and they do not ask for anything more than was agreed upon all hands that they should have, and which, as it seems to us, they ought to have. What was considered a fair thing— which no one seems to doubt — for the Tranquility stockholders should not be unfair to the Head Center stockholders, who have contributed their all in the way of property to the new corporation. Section 309, supra, in our judgment, does not inhibit a body of stockholders from “ doing for a lawful purpose, and without injury to creditors,” that which appears in this instance to have been for the best interests of all concerned.
As throwing some light upon this proposition, the appellate court, in the case of Chater v. San Francisco Sugar Refinery Co., 19 Cal. 220, may be referred to as having asserted that stockholders have a right to preserve their just rights of property in consonance with contracts which they may have made, notwithstanding the intervention of corporate agencies, which claim the property for themselves. In Short v. Beaudry, 56 Cal. 450, after quoting from the case supra, the court says: “ The truth is, the corporation, under our system, following such an agreement [as the one here shown], would be the mere agency of the associates, created for the sake of convenience in carrying out the agreement, as between those who made the bargain, the different characters or forms in which or by which the bargain was made, and the order in which the several parts of it were executed, making no substantial difference in the obligation.” The appellate court further said: “Substantial justice can be administered in this case by treating the parties in the light of their agreements be*398tween themselves, independently of their incorporation, and in no other way that we can discover can this be done.”
So in the present instance the court below seems to have done substantial justice as between all the parties to the transactions which resulted in the incorporation of the new mining company; and perceiving no judicial error in the record, we advise that the judgment .and order be affirmed.
Belcher, 0. 0., and Hayne, 0., concurred.
The Court.
For the reasons given in the foregoing opinion, the judgment and order are affirmed.