Mudd v. Lanier , 247 Ala. 363 ( 1945 )

It is insisted that section 234 of the Constitution does not apply to the 150 shares issued to Mr. Mudd because (a) it was a stock sale and not a stock issue, and (b) because it was an issue of stock against surplus. And it is also insisted, in the alternative, that the record shows that the corporation received money or property of full value for those shares.

We cannot accept the theory that section 234, supra, and section 26, Title 10, Code, do not apply to stock originally issued after the corporation is organized and is a going concern. Section 1, Title 10, Code, directs the way and manner in which a corporation shall be organized. Subsection (4), § 2 authorizes it to begin business with not less than 25% of its authorized capital: also the amount of its authorized capital must be stated and the number of shares into which it shall be divided. Of course all the balance of its authorized capital stock may be issued after it begins business. Section 234 of the Constitution prohibits the issuance of stock except for the consideration named. That includes all its capital stock as and when it is originally issued. Unissued stock can be disposed of by the corporation only on the basis of the requirements of section 234 of the Constitution and section 26, Title 10, Code. Perry v. Tuscaloosa Cotton Seed Oil Mill Co.,93 Ala. 364, 9 So. 217. After it has been issued for a proper consideration and reacquired by the corporation, otherwise than by a redemption, it is an asset in its treasury to be bargained and sold as every other asset. 18 C.J.S., Corporations, § 212, p. 245. But it should not be issued, or otherwise disposed of, as an original issue, except for the kind and amount of consideration named in the Constitution and statute.

We are not dealing with non-par stock, which has a different status under section 26, Title 10, Code, from par stock. See section 44, Title 10, Code; Randle v. Winona Coal Co., 206 Ala. 254,89 So. 790, 19 A.L.R. 118. Though it is of course controlled by section 234, Constitution. When par stock is issued the consideration should be of the same reasonable value as the face value of the stock. Section 26, supra; Perry v. Tuscaloosa Cotton Seed Oil Co., 93 Ala. 364, 9 So. 217; Riles v. Coston-Riles Lumber Co., 208 Ala. 508, 95 So. 43; Roman v. Dimmick, 115 Ala. 233, 22 So. 109; Parsons v. Joseph, 92 Ala. 403,8 So. 788; Fitzpatrick v. Dispatch Pub. Co., 83 Ala. 604,2 So. 727.

If the stock is issued for money, labor done or property actually received in some substantial amount, it will not be fictitious and void, though inadequate, but the subscriber may be liable in equity for the difference between the value received and the par value of the stock. Minge v. Clarke,203 Ala. 189, 82 So. 439; Riles v. Coston-Riles Lbr. Co., supra; Roman v. Dimmick, supra; Elyton Land Co. v. Birmingham Warehouse E. Co., 92 Ala. 407, 9 So. 129, 12 L.R.A. 307, 25 Am.St.Rep. 65; Nelson v. Hubbard, 96 Ala. 238, 250, 251,11 So. 428, 17 L.R.A. 375, at the instance of creditors or innocent stockholders. Riles v. Coston-Riles, supra; Nicrosi v. Irvine,102 Ala. 648, 15 So. 429, 48 Am.St.Rep. 92; Parsons v. Joseph,92 Ala. 403, 8. So. 788. As to the meaning of a subscriber in this connection see 14 C.J. 956, 957, 443 note 78; 18 C.J.S., Corporations, § 584, p. 1310, et seq.

"It is the statute, reinforcing the constitutional provision, (now section 26, Title 10, Code) which requires such correspondence in value in the case of subscriptions for stock." Nelson v. Hubbard, supra, 96 Ala. at page 250, 11 So. at page 432, 17 L.R.A. 375. (That refers to correspondence between value of the labor, property, etc., with the face value of the stock.) As to stocks, not bonds, such correspondence is required by section 26, Title 10, supra; Nelson v. Hubbard, supra, 96 Ala. at page 250, 11 So. 428, 17 L.R.A. 375.

The contention that capital stock may be issued against surplus is also made in appellant's brief, as justifying this transaction. But there is no allegation that the 150 shares issued to Mr. Mudd were against surplus. Sections 26 and 27, Title 10, Code, prescribe the conditions on which stock may be issued against surplus.

A corporation cannot without consideration issue stock against surplus for the benefit of one stockholder as it would be in the nature of a distribution of surplus to him, without making a ratable distribution to the other stockholders. The other stockholders who may have agreed to such an issue may not be able to complain, if their agreement is valid. We will not now say whether if such stock was issued against surplus and charged to surplus by consent of all the stockholders, for a valuable and adequate consideration, and so understood, the co-trustees could not bind these complainants by joining in it in good faith. It may be conceded that an issue of stock properly chargeable to surplus would not violate section 234, Constitution, if the surplus account was adequate, and based on accumulated tangible assets in excess of the capital stock, and arises from profits, not from enhanced values. The question was left open in Fitzpatrick v. Dispatch Pub. Co., 83 Ala. 604,2 So. 727. But we repeat there is nothing to show that this stock was issued against surplus, or charged to surplus, or that the judgment was to effect a distribution of surplus.

A stockholder has no valid subsisting claim for any part of the surplus or profits until a dividend is declared. First Nat. Bank of Tuscaloosa v. Hill, 241 Ala. 606, 4 So.2d 170. If the stock is given him without a valuable consideration, though paid for out of surplus or undivided profits, without a ratable amount also given to other stockholders, it must be by their consent effectively expressed.

The pleadings before us do not show that an amount representing the stock was charged to surplus and that there was adequate consideration for the surplus thus to be distributed to him, without other stockholders having a similar amount.

We do not say that a bona fide liability by the corporation to him on any account in an amount substantially equal to $15,000 would not support an issue of stock to him, provided the surplus and undivided profits accounts were able to take care of it, and it was charged to such accounts, or that it would be different from the payment of money to him in settlement of the claim and the use by him of the money to pay for the stock, and do not say that the co-trustees could not then validly so agree. That was left open in Fitzpatrick v. Dispatch Pub. Co., supra. We have no such case up to this time. See 18 C.J.S., Corporations, § 240, p. 672, notes 22 and 24. The co-trustees could not consent to the payment of a claim which has no substantial basis so as to bind the beneficiaries, whether such payment is made in money out of the profits or by the issuance of stock charged to surplus or profits.

So far we have dealt with the question on the theory that none of the 150 shares had ever been previously issued. By the word "issued" we do not refer to a sale of treasury stock, which has been previously issued and reacquired otherwise than by a redemption such as may be authorized by its charter.

The bill in the instant case refers to the issue of 150 shares to Mr. Mudd. Except as otherwise stated, we take that to mean originally issued. But it also alleges that 100 shares had been previously issued, retired and cancelled, and that the corporation had no power to reissue same. Let that be amplified by an amendment to the bill. It may very well be so, if it had been redeemed and retired by authority of the charter. 18 C.J.S., Corporations, § 201, p. 633, note 55.

It is insisted by appellant that the bill in case No. 53010, which is an exhibit to case No. 55708, shows that the Western Grain Company had a claim against the estate of decedent of $148,000, and which was released by the consent decree, in which the judgment in his favor for $15,000.00 was rendered (but we find no such statement in it); that this judgment was for the agreed amount of compensation for his loss as a stockholder in said claim so released; also, that certain bonuses to the officers and employees of the corporation were voted by the directors at the meeting held on December 17, 1941, amounting to $30,000, and that the judgment as shown by the bill in case No. 53010 was intended to adjust his rights as a stockholder in respect to those bonuses. (But no such intention appears in that case.) There is not enough shown by the bill in that case, made an exhibit to this one, to sustain those claims. The facts in that connection should appear more adequately to justify a consideration of the effect of that contention. The question (if adequately presented) would then arise whether by reason of the settlement of the claim of $148,000 by the corporation against the estate, Mr. Mudd as a stockholder in the corporation would have a just claim for loss thereby sustained against the corporation, payable out of surplus or profits, as that its satisfaction would be as for. money paid by the corporation to him and by him returned to the corporation, and whether that claim is the one on which the judgment was rendered, or was there some other basis for it. The question would also arise as to the $30,000 of bonuses voted to employees and officers of the company whether granting a stock issue to him on that account was thereby sufficiently supported by a constitutional consideration, and whether it was on that claim that the judgment was rendered.

We do not find a reference in the bill in case No. 53010 to the claim said to be of $148,000, above mentioned, though the consent decree releases the estate from liability to the corporation and treats all appropriate amendments as made to the bill. The decree is not clear as to the claim released. It is true that in the instant bill (M. R. No. 2, p. 468) it is alleged that at the directors' meeting of December 17, 1941, Mr. Mudd made such a claim, but it does not anywhere sufficiently appear to justify its treatment now as a feature of the, claim on which the judgment for $15,000 may have been predicated. It is not so alleged in the pleadings before us, though by agreement the pleadings may be treated as sufficient to support the judgment. But the agreement does not in that respect, nor anywhere else, set out the nature of the claim for which judgment was rendered.

The important question to be considered is not whether Mr. Mudd had a claim against the corporation sufficient to support the judgment and stock issue, but whether such a claim did support them, and was thereby satisfied and discharged. There was no such claim described in the complaint in case No. 53010, in which the judgment was rendered by consent, so as to inform us what was its nature. We also observe that the question is not controlled by what was intended by Mr. Mudd to be thereby settled, but since no complaint shows what it was, neither does the judgment, the question is controlled by what was agreed mutually to be the consideration for the judgment and stock issue. It would also be pertinent to know what en-tries were made on the books of the corporation as to the nature of the claim so settled. On what account was it charged? Was it taken from surplus and added to the capital account?

Appellants' argument in no respect meets our view that since the stock was issued to him by agreement in satisfaction of a judgment rendered by that same agreement, which was not to be satisfied in any other manner, the consideration for the stock is the satisfaction of the claim on which the judgment is based. The important question is, what was that claim thus discharged. If that claim did not satisfy the Constitution, section 234, and section 26, Title 10, Code, full payment for the stock issue cannot be supported in equity over the contention of an innocent stockholder. The bill says there was no basis for that judgment. It is not clear what that means. The bill should be amended to make a clear statement that the claim on which that judgment was rendered was not for sufficient money, property or labor such as to satisfy section 234, Constitution, and section 26, Title 10, Code, or other applicable requirements in quality or amount. We think further discussion in that connection need not be made.

The bill also should be amended to amplify the allegations made as to the 100 shares alleged to have been retired and cancelled.

The bill does not seek to cancel the issue of stock as we have previously noted, but to cancel the consent decree by which its issuance was authorized. We do not think the co-trustees could consent to the issue of stock whose issuance violated section 234, Constitution, as to the quality of the consideration required or violated section 26, Title 10, Code, as to the value of the consideration required so as to bind these complainants. We do not say that as to section 26, supra, they could not bind complainants by an honest conservative exercise of their right to contract for the trust in respect to the real values involved. That would not violate section 26. If the effect of such consent decree was to violate either the Constitution or statute, supra, it exceeded their authority, and the beneficiaries, complainants in this suit, may in equity have the consent decree cancelled as to them. We are not under the pleadings before us justified in expressing views as to the effect of that result upon other aspects of the situation. If that point is ever reached, the result should be determined upon issues made and there applicable and duly contested.

Application overruled.

All the Justices concur.