Court Opinion

ID: 6875412
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:07:05.646125+00
Date Added: 2024-06-11T16:05:29.197615
License: Public Domain

HEALY, Circuit Judge
(dissenting).
I agree with the opinion of the court so far as it affirms the judgment below, but ■dissent from the reversal.
I think the case is not difficult of determination if attention be centered on certain basic facts. If we concentrate on the verbiage of the resolutions, subscription warrants and letters, we become lost in a confusion of terms, the precise legal implications of which seem not clearly to have been understood even by the participants.
While appellant was organized for the purpose of operating as an auxiliary to the Bank of Italy, there is nothing in its corporate setup to differentiate it from the ordinary corporation. Its articles or bylaws, so far as the fecord shows, contain no provision limiting the ownership of its stock to any particular group, or prohibiting the unrestricted circulation of its shares. There is nothing in these confining the issuance of shares to trustees, ■or authorizing that practice. Nowhere in the governing rules of the corporation itself does anything appear defining the duties or powers of trustees who might become the holders of its stock. Provisions and restrictions of this sort are to be found snly in contracts dehors the corporation.
Appellant was not a party to the trust agreement of June 30, 1917. That contract was between the subscribers and the members of the executive committee of the Bank of Italy. Moreover, the 1917 agreement related only to shares then authorized and subscribed for. The contingency of an increase in appellant’s capital was not provided against in it. The handling and disposition of future shares were left to be dealt with by the interested parties when need therefor might arise. True, the agreement indicated a policy, but it left to future agreement the working out of the details of the policy as related to future issues of stock. It is also true that as a result of the agreement the trustees obtained the voting power and with it the full control of appellant’s affairs, but the power vested in the trustees was not unlimited nor one to be exercised in a purely arbitrary fashion. In a word, when the new stock was issued and sought to be disposed of in 1927 and 1928, there was nothing in the corporate articles or bylaws, or in the existing contract, which in a legal sense authorized the procedure followed by the board, or any other procedure except the normal corporate practice.
Turning first to the transactions involving the sale of 300,000 shares to others than the issuing corporation, it should be kept in mind that appellant had only one class of stock, namely, common stock. Its articles provided for no security denominated “beneficial interests.” It had no security of that kind for sale, and, I think, could not offer for sale or sell something it did not have, any more than it could sell preferred stock or securities of other types, when none had been authorized. All it had to dispose of was common stock, and this it proposed to sell at a given price per share.
The initial resolution providing for the sale óf 50,000 shares indicates this clearly enough. The opening paragraph is as follows: “Be it Resolved, that the 50,000 shares of the capital stock of Stockholders Auxiliary Corporation1 now remaining unissued be offered for sale at and for'the sum of $200 cash per share, said shares to be issued to trustees subject to the same agreements and trusts as shares heretofore issued.” In substance, and indeed in form, what the board of directors of appellant proposed was to sell these shares, *80subject to the condition that the shares be issued to trustees.
It is said that the purchasers were not offered stock, but only a beneficial interest. However that may be, the stock itself was sold. As a consequence of the sale the shares were issued, certificates evidencing them were delivered, and the full purchase price received by appellant. If the analogy to an ordinary sale is present, it is permissible to say that appellant irrevocably parted both with legal title and possession. If the stock was not sold to the individuals with whom the corporation dealt, il; is fair to inquire to whom it was sold. Not to the trustees, surely. The opportunity to purchase was not offered to them, the stock was not subscribed for by them, and they paid no part of the purchase price.
Perhaps a more restricted argument is intended, namely, that the purchasers were not offered an opportunity to obtain legal title to the stock. The argument, as it-seems to me, gives only a partial or negative statement of the offer. Putting it affirmatively, it amounts to no more than what I have already said, that the purchasers were offered the opportunity to buy the stock subject to the condition that the legal title to it be transferred directly to trustees. It is undeniable that appellant parted with its legal title as a result of the sale, hence it must have sold the legal as well as the equitable title. It did not sell the legal title to trustees and the equitable title to the other parties, for the trustees purchased nothing. Nor can it be thought that appellant sold an equity in the stock and gave away the legal title, for a corporation cannot lawfully give away its stock or any interest in it, legal or equitable.
It is elementary that the powers of a corporation are to be determined by reference to the corporate articles and by-laws and the statutes of the state. These had vested in appellant no inherent power to sell the corporation’s shares to one person and deliver the certificates to some other person as trustee. Nor does appellant appear to have been free, under the state law, to dispose of its new issues without first offering them to the beneficial owners of its existing shares. Recognition ■ of this fact is seen in the circumstance that the latter were requested to waive their rights in respect of the 250,000 shares proposed to be sold in trust to appellant to meet the purposes of a special plan. It is suggested, in effect, that the Giannini group, who were at once the directors and the trustees, were in full control of appellant and thus in position to impose their will. While granting this, we are not permitted to ascribe to the corporate board a purpose to act without authority of law or contract, and this is true however benign their objective.
Looking at the matter from the standpoint of the trustees, it seems equally clear that they had no inherent right to demand the issuance to themselves of shares for which they had furnished no part of the consideration. Their. relationship with the individuals who were the beneficial owners of the outstanding shares was purely contractual, and they had no contract with these individuals relative to the offered shares. It may be assumed that .they had a duty to effectuate the policy evidenced by the original trust agreement, but the duty could not lawfully be performed without the assent of the individuals with whom the corporation itself was under the necessity.of dealing. Here,, as in Raybestos-Manhattan, Inc. v. United States, 296 U.S. 60, 56 S.Ct. 63, 80 L.Ed. 44, 102 A.L.R. 111, the “generating source of the right to receive the newly issued shares” [page 65] was the payment to appellant of the purchase price exacted for them, and this consideration was furnished by persons other than the trustees.
We are driven, as it seems to me, to the alternative that the power of appellant’s board to. proceed as it did, as well as the authority of the trustees to receive the shares, necessarily had its source in the agreement or assent of those with whom the corporation dealt. The act of Congress imposes a tax on transfers of rights to receive shares, in whatever manner such transfers may be evidenced, “whether * * * shown by the books of the corporation, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer.” 44 Stat. 101. It is apparent that the agreement, if that be the form the transfer takes, need not be in writing, nor need it be express. It may be implied from the circumstances and the conduct of the parties. It may arise from the imposition of a condition, the tacit acceptance of which effects the agreement. “It is enough,” as said by Justice Stone in Raybestos-Manhattan, Inc. v. United States, supra, “if the right or interest transferred is, by any form of pro*81cedure, relinquished by one and vested in another.”
It is conceded that if one buys corporate stock and directs the issuance of it to trustees for his benefit, he initiates a taxable transfer of his right to receive. We do not have in such instance a transfer by agreement, but merely a unilateral act. But one who agrees that stock which he purchases shall be delivered to another effects a taxable transfer of the right to receive just as much as if he had, of his will alone, directed that course of procedure. It makes no difference if the arrangement in which he participates calls upon him to forego, at the inception, the right to receive the stock he pays for. It is not essential to the tax that one first acquire the right to receive, and then by subsequent act transfer it to a third person. As indicated in the Raybestos-Manhattan Case, supra, the transaction is taxable notwithstanding that the sale of the stock is made and the surrender of the right to receive it “effected simultaneously in a single document.”
The transaction between appellant and those who paid the purchase price of its shares cannot be considered otherwise than as a contract, resulting in the delivery of the shares to trustees. This disposition of the shares was necessarily one of the terms of the contract; hence, by agreement, the right to receive the shares they had paid for was relinquished by the purchasers and became vested in the trustees. When the purchasers manifested their assent to the proposal made to them, by paying the specified price for the shares offered, and the proposal was carried out, two taxable transactions ensued, (1) the transfer of 'the stock to the trustees, and (2) the relinquishment or surrender to the trustees of the buyers’ rights to receive the shares which they had paid for. It does not matter whether the assent of the purchasers to this form of procedure was given gladly or reluctantly, or whether assent was wrung from them as a condition precedent to their participation in the transaction at all.
The result need not shock our sense of justice. The purpose of the act of Congress was not to define methods of transfer or disposition of corporate stock, but to produce revenue. The greater the number of transactions becoming subject to the tax the more nearly is the object of the statute achieved. As said in the Raybestos-Manhattan Case, supra, “the reach of a taxing act whose purpose is as obvious as the present is not to be restricted by technical refinements.” And the court there said that the language of the act “discloses the general purpose to tax every transaction whereby the right to be or become a shareholder of a corporation or to receive any certificate of any interest in its property is surrendered by one and vested in another.”
In discussing the issuance of 250,000 shares to the trustees to be held in trust for appellant to meet the requirements of an employees’ compensation plan, and for other purposes, the main opinion says that “it is absurd to contend that the appellant corporation had a right to receive these shares from itself, which right it transferred to the trustees on issuance of them.” I see nothing absurd in the contention. The nature of this transaction is described by appellant in its letter to the shareholders ' in which it is said, “250,000 of said shares will be sold to Bancitaly Corporation2 at a price of $180 for each combined share.” It was stipulated that “250,000 * * * shares were issued to the then trustees under the said trust agreement of June 30, 1917, to be held by them under the terms of said trust agreement for the benefit of Bancitaly Corporation.” In other words, appellant purchased and paid for this block of its own shares and caused the shares to be issued to trustees to be held for its benefit. It seems obvious that the appellant participated in two taxable transactions, (1) the transfer of these shares to trustees, and (2) the transfer to the trustees of the right to receive them. Manifestly the corporation could have taken title to these shares in itself, or made such other disposition of the legal title as it saw fit. It chose to direct that the legal title be vested in the trustees.
I have suggested that the agreement to transfer need not be express, but may be implied. However, it seems to me that an express transfer of the right to receive is clearly to be spelled out in the situation before us; and this is true in respect of the shares issued as stock dividends as well as in the case of those sold.
It was stipulated that “at all times subsequent to June 30, 1917 all of the stock of plaintiff corporation was issued in the *82names of the trustees under said trust agreement of June 30, 1917 and held by said trustees under the terms of said trust agreement for the benefit of the owners of the beneficial interests in said stock of plaintiff corporation.” (Emphasis supplied.) As has been said, the, 1917 agreement related only to shares theta authorized and subscribed for.' While in the proceedings of appellant’s' board relative to the new issues there is language indicating unmistakably that the execution of new trust agreements was thought necessary, it does not appear that any were actually formulated. It seems obvious that the board could riot, by mere fiat, declare the old agreement operative in the case of shares not affected by it, and I think the board did not undertake so to declare. The terms of the old agreement were made effective in a different fashion.
As evidence of the rights in appellant’s shares, both those representing stock dividends and those sold, the following indorsement was made upon each Bank of-Italy certificate: “The owner of the shares of stock represented by this certificate is beneficially interested in a like number of shares of the capital stock of the [appellant corporation], by and under a certain trust agreement, which beneficial interest is subject to all the terms, conditions, obligations and limitations of said agreement;” The trust agreement referred to is obviously the 1917 agreement. It is elementary that the parties concerned by accepting certificates so- indorsed became bound “by all the terms, conditions, obligations and limitations” of that agreement. In legal effect they adopted the instrument as their own.
One of the terms of that agreement was that the subscribers “hereby respectively transfer, assign and set over and agree to surrender in trust, upon' the trusts hereinafter declared, unto the [trustees] * * * all the right, title and interest * * * in and to the shares of stock, and all the shares of stock of [appellant corporation] * * * and hereby agree to the issuance of, and hereby authorize, empower and direct said [appellant corporation] to issue, the certificates of stock to * * * said [trustees].” Here, I think, is an express transfer of the right to receive. Had a new agreement between the trustees and the beneficial owers been entered into with each new stock issue, substantially identical in its terms with the original, the surrender of the right to receive the shares could not have been more clearly manifested.
What has been said, I think, disposes of the taxability of the stock dividend transactions, as well as the taxability of the transactions involving sales. In relation to the former, however, there is the added circumstance that under the terms of the trust agreement the beneficial owners were entitled to receive all dividends on appellant’s stock. The acceptance of the indorsed certificates evidencing the beneficial interest in the dividend shares evidences also the transfer to the trustees of the right to receive them.

 Sueh was the then name of appellant.

 This was the then name of appellant.