No. 86-405
IN THE SUPREME COURT OF THE STATE OF MONTANA
1987
ROBERT G. GRAY, a/k/a PAT GRAY,
Petitioner and Appellant,
-vs-
HARRIS LAND AND CATTLE CO. and its
BOARD OF DIRECTORS and MEMBERS thereof,
MARJORIE GFAY, DORAN LYNCH and VALERIE
SOLANDER,
Respondents and Respondents.
APPEAL FROM: District Court of the Eighth Judicial District,
In and for the County of Cascade,
The Honorable Joel G. Roth, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Emmons & Coder; H. William Coder, Great Falls,
Montana
For Respondent:
Scully, Lilly & Andriolo; John P. Scully, Rozeman,
Montana
Submitted on Briefs: Dec. 31, 1986
Decided: Play 15, 19C7
MAY 1 Ij 1987
Filed:
*#
Clerk
Mr. Justice John Conway Harrison delivered the Opinion of the
Court.
This appeal arises from a dismissal of a petition for
writ of mandamus entered by the District Court of the Eighth
Judicial District in and for Cascade County. Appellant, a
shareholder in a closely held corporation, sought to sell his
shares to a party outside the corporation, but was prevented
by the remaining shareholders. Appellant filed a petition
for writ of mandamus seeking an order to compel this sale,
but the District Court dismissed the petition. We affirm.
The parties presented this case upon stipulation of the
facts. Harris Land and Cattle Company is a small, closely
held farming and ranching corporation consisting of five
family shareholders. In 1978, the corporation executed a
Buy-Sell Agreement designed in part to allow the shareholders
an opportunity to keep the corporation within the closely
held group.
Paragraph (1) of this Agreement requires that so long
as all the shareholders are alive, any shareholder who wishes
to dispose of his stock must first obtain the written consent
of the remaining shareholders and of the corporation. This
paragraph provides in full:
1. So long as all of the STOCKHOLDERS
are alive, they each shall not encumber
or dispose of the stock of the
CORPORATION which he or she now owns or
may hereafter acquire without the written
consent of the remaining STOCKHOLDERS and
that of the CORPORATION.
Paragraph (5) of the Agreement provides that any shareholder
who wishes to dispose of his stock must first offer to the
corporation the stock for sale. If the corporation declines
to purchase the stock, the selling shareholder must then
offer the stock to the other shareholders. This Agreement
was signed by each of the shareholders.
In August 1985, one of the shareholders, Robert Gray,
notified the corporation, through its other shareholders, of
his desire to sell his stock in the corporation. In
accordance with a separate provision in the Buy-Sell
Agreement, Gray requested that the corporation appoint an
independent appraiser to evaluate the underlying assets of
the corporation for the purpose of valuing the stock. The
remaining shareholders, however, in October 1985, invoked the
provisions of paragraph (1) of the Buy-Sell Agreement and
refused their consent to Gray's sale. They unanimously voted
not to appoint an independent appraiser.
Gray responded by filing with the District Court a
petition for writ of mandamus, seeking an order to compel the
corporation to appoint an appraiser as a prerequisite to the
sale of this stock. The District Court, however, dismissed
Gray's petition. Gray now appeals.
The central issue on appeal concerns the validity of
the share transfer restrictions contained within the Buy-Sell
Agreement. The common law has never formulated a precise
definition of a close corporation, but the term is commonly
used to distinguish a family corporation or a corporation
with only a few shareholders from the public-issue or
publicly held corporation. See generally, 1 O'Neal,
Close Corporations, § 1.02 (1971).
This Court has previously described a close corporation
as:
one in which management and ownership are
"substantially identical to the extent
that it is unrealistic to believe that
the judgment of the directors will be
independent of that of the stockholders."
Thisted v. Tower Management Corporation (1966), 147 Mont. 1,
14, 409 P.2d 813, 820 (quoting The Close Corporation, 52
Nw.U.L.Rev. 345 (1957)).
Due to their very nature, close corporations often
utilize share transfer restrictions. Because ownership and
management are so intimately related in such entities,
shareholders in a closely held enterprise usually desire to
retain the power to choose future associates. 2 O'Neal,
supra, 5 7.02. This practice has long received judicial
recognition. See e.g., Barrett v. ~ i n g(Mass. 1902), 63 N.E.
934, 935. This interest, however, must be balanced against
the traditional right of free alienability of one's personal
property.
Consideration of these competing interests has led
courts to sustain share transfer restrictions which are
deemed reasonable in light of all the relevant circumstances,
but to invalidate absolute restrictions forbidding the
alienation of corporate stock. See e.g., Hill v. Warner,
Berman & Spitz, P.A. (N.J. 1984), 484 A.2d 344, 350-51;
Renberg v. Zarrow (Okla. 1983), 667 P.2d 465, 469; ~ a y a r dv.
Fayard (Miss. 1974), 293 So.2d 421, 423; 2 0'~eal, supra,
S 7.06.
Against this backdrop, appellant now challenges the
restrictions imposed by the Buy-Sell Agreement. He concedes
the reasonableness of the provisions contained within
paragraph (5) of the Agreement, restricting the sale or
transfer of corporate stock without first giving the
corporation and then the remaining shareholders an
opportunity to purchase the stock. Appellant, however,
contests the consent restriction found in paragraph (1),
requiring prior approval from the corporation and the other
shareholders before a shareholder may attempt to dispose of
his or her stock. Such a restriction, appellant contends,
constitutes in effect an absolute restriction upon his right
of alienability.
In upholding the consent restriction, the District
Court stated in its findings of fact, from which no appeal
has been taken, the following:
The corporation is a small, closely held
corporation consisting of family members.
To further the purpose of keeping the
shares of stock in a closely held group,
the parties agreed as follows in
paragraph 1 of the Buy-Sell Agreement:
"1. So long as all of the STOCKHOLDERS
are alive, they each shall not encumber
or dispose of the stock of the
CORPORATION which he or she now owns or
may hereafter acquire without the written
consent of the remaining STOCKHOLDERS and
that of the CORPORATION."
The court made further reference to the provisions of
the Agreement which specified the manner in which stock would
be offered and purchased. The District Court further found:
2. The operations of the corporation
consist predominantly of farming and
ranching. The shareholders and board of
directors are the major contributors to
the operations and the operations are
consistent with the corporation's
Articles of Incorporation and By-Laws.
The intent of the parties at the time of
entering into the Buy-Sell Agreement was
to prohibit the entrance of third parties
into the closely held corporation frame
work.
Based upon its findings, the court concluded that
5 35-1-617(3), MCA, provided for the restrictions on transfer
and that the restrictions in paragraph 1 of the Agreement met
the statutory requirements. Section 35-1-617, MCA, in
pertinent part provides:
(1) A written restriction on the
transfer or registration of transfer of
shares of a corporation, if permitted by
this section and noted conspicuously on
the certificate representing such shares,
may be enforced against the holder of the
restricted shares or any successor or
transferee of the holder ...
( 3 ) A restriction on the transfer of
shares of a corporation is permitted by
this section if it:
(a) obligates the holder of the
restricted shares to offer to the
corporation, to any other holders of
shares of the corporation, to any other
person, or to any combination of the
foregoing a prior opportunity, to be
exercised within a reasonable time, to
acquire the restricted shares;
(b) obligates the corporation, any
holder of shares of the corporation, any
other person, or any combination of the
foregoing to purchase the shares which
are the subject of an agreement
respecting the purchase and sale of the
restricted shares;
(c) requires the corporation or the
holder of any class of shares of the
corporation to consent to any proposed
transfer of the restricted shares or to
approve the proposed transferee of the
.
restricted shares [ ]
Appellant argues that the effect of the District Court
opinion is to permanently prohibit the sale of stock. That
is not consistent with the wording of the Agreement itself.
In paragraph (1) the Agreement states that so long as all of
the stockholders are alive, they each shall not encumber or
dispose of the stock of the corporation without the written
consent of the remaining stockholders and that of the
corporation. The term of this provision is so long as the
initial five stockholders are alive. That of course does not
constitute a perpetual limit on the right of sale and on its
face is not unreasonable.
The argument is made that because S 35-1-617, MCA, was
not enacted until 1981, which was three years after the
execution of the Buy-Sell Agreement, the statute cannot be
retroactively applied. The theory of retroactivity is not
appropriate in the present instance as we are not attempting
to apply a statute to a contractual action which took place
prior to the enactment of the statute and which is somehow
adversely affected by the statute itself. In the present
case, all five of the stockholders freely executed the
Buy-Sell Agreement. By that action they established
restrictions on their individual rights of transfer of the
shares. Subsequently, the legislature enacted S 35-1-617,
MCA, which specifically provided for the enforcement of
various types of restrictions on the transfer of shares of
corporations. We conclude that the statutory provisions
merely demonstrate legislative approval of the action
previously taken by the stockholders. As a result, we
conclude that the statutory provisions of S 35-1-617, MCA,
can properly be applied to the Buy-Sell Agreement without a
question of improper retroactivity.
We agree with the conclusion of the District Court that
the Buy-Sell Agreement provision was proper under the
provisions of S 35-1-617 (3)(c), MCA. The appellant has
failed to submit any theory which demonstrates a reason for
finding the Buy-Sell Agreement improper or unconstitutional.
We note that other jurisdictions have tested the validity of
share transfer restrictions by determining whether or not the
restrictions were reasonable in the light of all relevant
circumstances. 2 O'Neal, supra, S 7.06. At 12 W. Fletcher,
Cyclopedia of the Law of Private Corporations, S 5461.3,
(rev. perm. ed., 1985), the author points out that the
underlying test for determining reasonableness is whether the
restraint is sufficiently needed by the particular enterprise
to justify overriding the general policy against restraints
on alienation. We conclude that the findings of fact clearly
demonstrate facts warranting the stock restriction and
further conclude that the stock restriction is a reasonable
method of meeting the requirements of the statute. We hold
that the consent restraint contained in the Buy-Sell
Agreement was valid and enforceable.
In sum, we find that the share transfer restrictions
contained within the Buy-Sell Agreement are valid and
enforceable. Accordingly, the corporation had no obligation
to appoint an independent appraiser and appellant's petition
should have been dismissed. The result reached below is
therefore affirmed.
We concur: