Kohl v. Lilienthal

Fox, J.

In 1882 two mining corporations—the Head Center Consolidated Mining Company, organized under the laws of California, and the Tranquility Mining Company, organized under the laws of New Jersey, were in possession of adjoining mining claims in the Tombstone mining district in the territory of Arizona. Litigation'of a vexatious character had arisen between them, and for the purpose of discontinuing the strife and of promoting the mutual interests of both companies, negotiations were entered into with a view to effecting a consolidation of the interests and properties of the two. Being organized under the laws of different states, they were advised that this could not be done by a consolidation of companies, as provided by the laws of California. After considerable negotiation on the subject, it was decided to organize a third company, to be knowm as the Head Center and Tranquility Mining Company, with a nominal capital stock, consisting of two hundred thousand shares, and to which each of the old companies should transfer its mining ground, each in consideration of five dollars and of one hundred thousand shares of the stock of the new company.

This new company was incorporated on the 1st of December, 1882, and a, board of seven directors selected, three to represent the interests of the stockholders of each of the old companies, and a seventh who was impartial between them.

To this new company when organized a proposition was formally made to convey the grounds known as the Head Center and Yellow Jacket claims (they being of the property of the Head Center Consolidated Mining Company) to it, in consideration of the sum of five dollars and of one hundred thousand shares of the stock of the company, and a like proposition on the part of the Tranquility Mining Company, to convey to it the Tranquility mining claim, with its appurtenances, for a like consideration, and both propositions were accepted, by resolution of the board of directors, unanimously passed. On the 4th of January, 1883, at a meeting of its board of directors, the Head Center Consolidated Company passed the necessary resolutions authorizing its president and secretary to make the necessary conveyances to carry out this proposition, and on the 25th of the same month, at the annual meeting of the stockholders of the same company, at which 160,165 shares of the 164,211 outstanding shares of the stock of the company were represented, this action of the directors was ratified, and on the 27th of February following a deed was executed accordingly.

On that day Mr. Benjamin, to whom the secretary of the new company had been directed .to issue the 100,000 shares of stock in the new company for the Head Center Company, directed the secretary to issue 99,980 shares of the stock to him as trustee, and the remaining portion 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 paid for the property of the Tranquility Company should be issued, directed that 99,975 shares of it be issued to Mr. Kohl as trustee, and the rest to the remainder of the directors, which was done.

The stock thus issued was deposited in the Anglo-California Bank, to be held subject to the joint order of Kohl and Foster. Although the question of what disposition was finally made of that part of it which was issued in payment for the property of the Tranquility Company is not involved in the issues of this cause, it is claimed that it was distributed to the shareholders of the original Tranquility Company in proportion to their respective number of shares of Tranquility stock, and that no question was ever made as to the right to make such distribution; and this fact is urged upon us as strongly persuasive of the correctness of the claim of these plaintiffs, to have that part of the stock of the new company which was issued in payment for the property of the Head Center Company distributed among its stockholders, in proportion to the number of shares held by them respectively in said last-named company. But we fail to see the force of that argument, or how evidence of what the stockholders of a New Jersey corporation may have done, or agreed to do, was in any manner relevant or material in this action. The laws of New Jersey may permit such a distribution of the assets which form the capital stock of a corporation organized under its laws. But whether they do or not, the action of the stockholders of a New Jersey corporation, in the matter of the distribution of the assets of their own company, cannot change the laws of California, and for this reason, as well as because there was no contract between the two companies on the subject of the disposition which should be made of the stock of the new company when received, nor any reason why there should be such a contract, the admission of evidence upon that subject (a^ to what the Tranquility people did with their stock) was error, manifestlj'- prejudicial to the defendants in this cause.

The mining ground of the Head Center Consolidated Mining Company so conveyed to the Head Center and Tranquility Company did not comprise all the property of the former company. It had and still has left a mill for the reduction of ores, and is still carrying on corporate business and reducing ores, a part of the time at least at said mill, and keeps a general agent and superintendent in Arizona to look after its affairs. It was not free from debt at the time it sold this property, but some six months afterward levied and collected an assessment and paid up its then existing indebtedness. Its term of corporate existence has not expired, and it has not attempted to, and does not propose to, disincorporate.

Under these circumstances, the plaintiffs, Kohl, Moody, and Relifisch, bring suit against the defendants, the Head Center Consolidated Mining Company, and certain of its officers, alleging that they, the plaintiffs, are the owners and holders of 63,138 shares of the capital stock of the Head Center Consolidated Company, and as such, and by reason thereof, are entitled to have and receive to their own use 39,115 shares out of the 100,000 shares of the capital stock of the Head Center and Tranquility Mining Company so received for the sale of the property of the Head Center Consolidated Company, and pray a decree compelling the defendants to transfer, issue, and deliver the same to them, and restraining the defendants from representing, voting, or dealing in any way with the shares so claimed by plaintiffs. The defendants claim that these shares are the property and assets of the Head Center Consolidated Company; that the company has no right under the law to distribute them to its stockholders, and that its directors are entitled to represent and vote them at all meetings of the Head Center and Tranquility Company.

The plaintiffs had judgment in the court below, and from this and an order denying a motion for new trial, the defendants appeal. The grounds of the appeal, briefly 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.

We have already substantially stated most of the facts as found by the court or admitted by the pleadings, so far as they are necessary to this opinion. There is, however, one other fact found by the court, necessary to the support of its judgment, if under the law it could be supported at all, but which finding we do not think is supported by the evidence. That finding is, that it was “ mutually understood and agreed by and between the stockholders of both the old companies, that the stock of the new company should be equally divided between and belong to the stockholders of the old companies.” We are unable to find competent or satisfactory evidence of any such agreement,—especially of such an agreement among the stockholders of the company defendant here, or between any portion of such stockholders. There is plenty of loose and vague talk of an “understanding” of that kind, and we have no doubt that some of the stockholders did suppose, and in some sense understood, that there would be such a distribution of the stock as plaintiffs are here seeking to enforce. But this is an understanding which each of the stockholders who had it at all had with himself, or with such, others, part only of the whole, as happened to share it. It was not the basis of any treaty or agreement among the stockholders, or between them and the directors. But suppose there had been such an agreement among even a large majority of the stockholders, it would have been an agreement to change the terms of an existing contract which the statute had made between the whole body of stockholders, and would not have bound the non-concurring minority. If but a single stockholder, owning but a single share of the stock, had objected, the directors would have been bound to regard his protest. There is no pretense that all of the stockholders of this corporation consented to the distribution of this stock. Over four thousand shares of the stock outstanding were unrepresented at the meeting which ratified the consolidation; a large amount of the stock was represented by proxy, and the proposition to distribute did not, and could not, come before the meeting. The “understanding” that there was to be a distribution must be referred to some other occasion. The witnesses who testify to it leave it in the clouds. Only a minority of the stock — scarcely a third — is represented by the plaintiffs in this action, and the holders of a very large proportion of the stock positively deny that any understanding or agreement to distribute the stock of the consolidated company ever existed.

But it would make no difference if the fact were otherwise. Even if a small minority of the stockholders have not consented, this court should not command the directors to do what by the plain language of the statute they are forbidden to do.

Nor is there any force in the suggestion that the minority (if it be a minority) are not here objecting. Naturally they are not here objecting in their own names because they have not been made parties to this action. But they are represented here by the directors, who, as in duty bound, are urging the objection in their behalf. Manifestly, the interests of all the absent stockholders are involved in the litigation, and unless the directors are to be heard upon this ground, it results that the rights of the stockholders are to be adjudicated without a hearing.

The statute (Civ. Code, sec. 309) which controls the directors, and by which we are also bound in this case, reads as follows:—

“The directors of corporations must not make dividends, except from the surplus profits arising from the business thereof; nor must they divide, withdraw, or pay to the stockholders, or any of them, any part of the capital stock; nor must they create debts beyond their subscribed capital stock, or reduce or increase the capital stock, except as hereinafter specially provided. For a violation of the provisions of this section, the directors under whose administration the same may have happened (except those who may have caused their dissent therefrom to be entered at large on the minutes of the directors at the time, or were not present when the same did happen) are in their individual and private capacity jointly and severally liable to the corporation, and to the creditors thereof, in the event of its dissolution, to the full amount of the capitál stock so divided, withdrawn, paid out, or reduced, or debt contracted; and no statute of limations is a bar to any suit against such directors for any sums for which they are made liable by this section. There may, however, be a division and distribution of the capital stock of any corporation which remains after the payment of all its debts upon its dissolution, or the expiration of its term of existence.” (The Italics are our own.)

The term “ capital stock,” as used in this section, has a very different meaning from that of “shares of the capital stock,” as representing the interest which the holders thereof have in the business and property of the corporation whose shares they hold. “Capital stock,” as used in this section, is frequently otherwise and as well expressed by the simple word “capital,” and means the money and property with which the company carries on its corporate business. (Martin v. Zellerbach, 38 Cal. 309; 99 Am. Dec. 365.) It is vested in the corporation as a sacred trust for the protection of its creditors. (Martin v. Zellerbach, 38 Cal. 309; 99 Am. Dec. 365; San F. & N. P. R. R. Co. v. Bee, 48 Cal. 398.) This money and property of the corporation constitutes the actual capital of the company, to which all persons having dealings with the corporation, by means whereof they may become its creditors or become personally liable for its debts (as shareholders do become, under the of laws this state, for their proportionate share of all its debts created while they are stockholders), look, and have a right to look, to determine the measure of the company’s responsibility and of their security. The bare fact that a man holds “shares in the capital stock” of a corporation gives him no legal title to the property of the corporation. That remains in the corporation, and not in the shareholders. (Gorham v. Gilson, 28 Cal. 484; Gashwiler v. Willis, 33 Cal. 19; 91 Am. Dec. 607; Miners’ Ditch Co. v. Zellerbach, 37 Cal. 591; 99 Am. Dec. 30; Wright v. Oroville G. S. & C. M. Co., 40 Cal. 20; Clark v. San Francisco, 53 Cal. 311; Johnson v. Kirby, 65 Cal. 433; McCormick v. Springfield F. & M. I. Co., 66 Cal. 363.) The shares simply represent the proportion to which the respective shareholders, who may be such at the date of distribution, are severally entitled in the distribution of profits arising from the corporate business, which may be made from time to time, and in the final distribution of the estate of the corporation, when from any cause it shall cease to exist, and its estate shall have been fully administered. This event may happen at the expiration of the term of its corporate existence, or it may be accomplished earlier with the consent of the holders of two thirds of its shares, and upon the judgment of a court of competent jurisdiction. (Code Civ. Proc., secs. 1227-1233.)

But this event has not happened in this case. The Head Center Company has sold its mine to a new corporation for one hundred thousand shares of the stock of such new corporation; but it has not ceased to exist as a corporation, and does not propose to do so. It remains a corporation, with full corporate power and capacity, and is also exercising those powers. The mine which is sold constituted the bulk of its capital, or “ capital stock.” The stock which it received in exchange for its mine stands in the place and stead of the mine, precisely the same as if it had been money or any other kind of property instead of stock; and by the plain terms of the section of the code cited, the directors are forbidden to divide it among the stockholders. But it is said that this section operates only to restrain the directors, and does not prevent the stockholders from doing by agreement what the directors are forbidden to do. As already shown, we do not think the evidence proves any such agreement by the stockholders; but if it did, we hold that even the unanimous assent or agreement of the stockholders would not authorize such a distribution. The inhibition runs against the directors because they are, under the law, the managers of the business of the corporation. What the directors cannot do (with few exceptions, of which this is not one) the stockholders cannot do, or authorize to be done. The inhibition of the statute has regard not only to the rights of existing creditors, but to those of all persons who may deal with the corporation on the faith that its capital hgs not been divided. Certainly the effect and operation of the statute, if unrepealed by judicial construction, would be to afford a large measure of protection to future as well as existing stockholders and creditors; and having that effect, it ought to be supposed that such was its purpose. It cannot be assumed that the legislature intended that corporations who have divided up among their stockholders the capital stock wdth which they were doing business should continue to maintain a corporate existence, with power to contract, incur debts, and perpetrate the munberless frauds that would, under such circumstances, be within their power. A contrary intention is clearly implied in the express provisions of the Code of Civil Procedure relating to the dissolution of corporations (sections 1227 to 1233), and of the Civil Code above quoted, allowing distribution of their remaining capital after payment of their debts, upon dissolution or expiration of their term of existence.

When a method of procedure is prescribed by which a corporation may be dissolved, that method must be followed. When it is provided that the application must be made to the superior court, and must be in writing, verified, and must show “that at a meeting of the stockholders, called for that purpose, the dissolution of the corporation was resolved upon by a two-thirds vote of all the stockholders, and that all claims and demands against the corporation have been satisfied and discharged,” there will be none so bold as to contend that a voluntary dissolution of a corporation can be effected without compliance with these requirements; and it is equally certain that when the legislature has said, in the same section of the code in which it has forbidden the directors to divide the capital stock of a corporation among the stockholders, that the remaining capital may be distributed, after the payment of all its debts, upon its dissolution or the expiration of its term of existence, the intension was that there should not be a distribution under any other circumstances.

And why, it may be pertinently asked, should any court go out of its way to order a distribution in any other mode or under any other circumstances than the statute prescribes ? If the debts of the Head Center Company are paid, and two thirds of its stockholders desire a distribution, nothing could be easier than to accomplish everything that is sought in this action by simply pursuing the statute. Why,' when there is a plain and speedy statutory remedy, should this extraordinary remedy be allowed? The only answer to this question must be that the parties desiring this distribution cannot comply with the statute,—that two thirds of the company do not desire to dissolve and distribute the capital; therefore this court is called upon to order a distribution without dissolution, and to sanction the continued existence of a corporation with little or no capital,—in other words, to do what the statute has never authorized the court to do and has forbidden the directors to do. And this, too, when to do it we must establish a precedent under which less than two thirds of the stockholders of a corporation may at any time compel a distribution of the whole or any part of its capital, upon the most,loose, vague, and unsatisfactory oral testimony that there was an “understanding ” among the stockholders that it should be divided. In other words, stockholders who have heretofore imagined that in entering a corporation they were becoming parties to a contract, the terms of which were written in the statutes of the state, are to be informed that the contract may be changed and their rights impaired by an “understanding” among an indefinite number of their fellow-stockholders. A wide door would thus be thrown open to frauds, and contract rights would be taken away from contracting parties without their consent.

The statute upon this subject is too plain to admit of a doubt or to leave room for construction. It was so held and adjudged by this court more than twenty years ago in a well-considered and able opinion, which has ever since been accepted as established law, under which rights in property have accrued to an untold amount, which ought not now to be disturbed. Upon the faith of this statute, as it was found in almost identical terms-with the present section 309 of the Civil Code, in section 13 of the corporation act of 1853, and of the decision referred to (Martin v. Zellerbach, supra), thousands of people, and no doubt among them these plaintiffs, have assumed the liabilities of shareholders in corporations, which possibly they would not have assumed had they not been thus assured of the protection resulting from keeping the capital of the corporation intact until its final dissolution.

The only- difference between that case and this was that there the two corporations uniting to form the third were both domestic corporations, and the consideration for the transfer of the property to the new corporation was not by “understanding,” but by actual agreement of both corporations, and of all the shareholders of each, that the stock of the new corporation should be issued and delivered directly to the share-holders of the old ones, in proportion to the number of shares which they respectively held in the old. The court held, in the most emphatic terms, that the language of the statute left no room for construction or doubtful interpretation, and that this agreement for the distribution of the shares of the stock of the new corporation, received for the transfer of the property of the old companies, was in direct violation of the statute; that these shares must remain the property of the old companies, in lieu of the property for which they had been received, and as constituting the capital of the old companies, not to be distributed until their dissolution and the payment of their debts.

This has been the written law of this state for more than thirty-five years. Under it all our corporations have come into existence, and their stock has been distributed among its people. It has constituted one of the bulwarks pf corporate stability, and one of the chief securities of persons dealing with corporations, either as creditors or share-holders. The legislature has not changed it by enactment; the court cannot do it by interpretation.

Judgment and order reversed.

Beatty, 0. J., Works, J., Paterson, J., and Sharp-stein, J., concurred.