San Antonio Hardware v. Sanger , 151 S.W. 1104 ( 1912 )

On Motion for Rehearing. That part of the act of 1907 relating to private corporations, known as article 1152, Revised Civil Statutes of 1911, which authorizes a decrease of the capital stock of any corporation, does not apply to a case like the present. The purchase of the stock by the corporation was not intended to decrease the capital stock, and the shares were not retired, but held with the intent to again sell them. If the corporation had, by the purchase, intended to decrease its capital, it would not have succeeded because there was no compliance with the article, and it might have been compelled to again sell the stock. That statute certainly does not prohibit the purchase of its stock by a corporation, and if it did it does not authorize the corporation to seek to evade its obligations in a case where the party contracting with it has fully performed all he agreed to do, by a plea that it violated the law in making the contract. In Herman on Estoppel, § 1179, it is said: "When a contract has in good faith been fully performed, and nothing remains to be done by the party seeking relief, and all the shareholders have acquiesced in its performance, the plea of ultra vires or mere want of power is not available by the corporation in an action brought against it for not performing its portion of the contract." That language was approved in Railway v. Gentry, 69 Tex. 625, 8 S.W. 98, and in the case of Bond v. Terrell Mfg. Co., 82 Tex. 309, 18 S.W. 691, the Gentry Case is approved. So in 5 Thompson on Corporations, § 6016, it is said: "The great mass of judicial authority seems to be to the effect that where a private corporation has entered into a contract in excess of its granted powers, and has received the fruits or benefits of the contract, and an action is brought against it to enforce the obligation on its part, it is estopped from setting up the defense that it had no power to make it." The text is supported by ample authority, as shown by the cases cited in the footnote. To the same effect are Logan v. Association,8 Tex. Civ. App. 490, 28 S.W. 141, and Nat. Bank v. Oil Co.,24 Tex. Civ. App. 645, 60 S.W. 828; Chapman v. Iron Clad Co., 62 N.J. Law, 497, 41 A. 690.

In the National Bank Act it is provided that no bank "shall make any loan or discount on the security of the shares of its own capital stock nor be the purchaser or holder of any such shares," except under circumstances named, for its own protection, and in the case of Lantry v. Wallace, 182 U.S. 536, 21 Sup.Ct. 878, 45 L.Ed. 1218, where shares were purchased in open defiance of the law, the highest judicial tribunal in this country held: "In view of these decisions it cannot be held that the purchase by the bank of its own shares of stock was void. It was, of course, a matter of which the government by its officers could take cognizance; and it may be that it was a matter of which stockholders, having an interest in the proper administration of the bank, could complain in a proceeding instituted by them to restrain the bank from violating the statute."

In the case of Crandall v. Lincoln, 52 Conn. 73, 52 Am.Rep. 560, where it was held that the officers of a corporation must restore funds for shares of stock sold by them to a corporation, it was said: "We do not intend to say that under no circumstances can a corporation legally become the owner of its own stock. * * * Nor do we intend to say that a direct purchase would be declared illegal at the instance of a party to the transaction."

Again, in an English case — and English cases usually hold that a corporation cannot purchase its shares of stock — it was held that, where differences had arisen between the company and one of its directors, the company had the authority to purchase the shares. In another English case, Re Balgooley Distillery Co., it was held, it is said with reluctance, that the company did not act ultra vires in selling a quantity of whisky to one of its shareholders and taking in part payment therefor shares of its stock. Both of the decisions were placed on the ground of the necessity of the corporation. The cases are quoted from in notes under Hall v. Henderson, 61 L.R.A. 621. Those cases have peculiar application to the facts of this case where the shares of stock were bought in order to prevent "great and irreparable loss, if not insolvency" of the corporation. The shares were not "retired or merged," but it was provided in the resolution authorizing their purchase that they should be "resold and reissued under the direction of the board of directors."

In the case of Blalock v. Mfg. Co., 110 N.C. 99, 14 S.E. 501, it was held: "The shares of the capital stock of the defendant corporation were the lawful subject of purchase and sale, might be bought and sold in the market, and, in the absence of statutory provision to the contrary, it might buy such shares for its own benefit from owners of them, upon such terms as might be agreed upon subject to the rights of its creditors in proper cases to resort to its capital stock, paid and unpaid, as a trust fund out of which they may be entitled to have their debts paid. It is bound by its agreements with persons from whom it may purchase such shares of stock, and they may enforce the same by proper legal remedies, just as they might do in case of like agreements in respect to any other species of property. Hence if it made its promissory note to one of its stockholders for the price, or any part of it, that it agreed to pay him for his shares of stock, he would have his remedy, so far as it is concerned, just as any other creditor would, certainly subject to the possible rights of other creditors against him as a stockholder in some cases wherein he might be liable. If he were not liable to other creditors in some way as a stockholder, he would be on the same footing as such creditors. There is no just reason why he should not be. The defendant corporation is therefore bound to pay the stockholders, respectively, whose shares of stock it bought, the several sums of money it agreed to pay for the same." We think the quotation states the law applicable to the facts of this case, and it is upheld and supported by the weight of American authority. Fremont Carriage Co. v. Thomsen, 65 Neb. 370, 91 N.W. 376; Dock v. Schlichter, 167 Pa. 370,31 A. 656; Farmers' Bank v. Champlain Trans. Co., 18 Vt. 131; Lowe v. Pioneer Threshing Co. (C. C.) 70 F. 646; Crandall v. Lincoln, 52 Conn. 73, 52 Am.Rep. 560; New England Trust Co. v. Abbott, 162 Mass. 148,38 N.E. 432, 27 L.R.A. 271; Marvin v. Anderson, 111 Wis. 387, 87 N.W. 226; Calteaux v. Mueller, 102 Wis. 525, 78 N.W. 1082.

Again, we hold that article 1152 could not affect the contract in this case because appellee was informed by the resolution of the board of directors that there was no intention to decrease the capital stock, but that the shares should be sold, and provision was made for the use of the funds arising therefrom. Up to the time of the consummation of the contract of purchase there was no decrease in the capital stock of the corporation, and appellee had no notice whatever that it was contemplated to decrease the capital stock, if such was in contemplation. But there is nothing that tends to show that any decrease was in contemplation; the sole object apparent being the preservation of the existence of the corporation. Not only American, but English, decisions recognize that such a condition of affairs creates a necessity that would justify a purchase of the shares of stock. While in the light of subsequent events it appears that another person than the one chosen should have been removed from the corporation for its good, still the plan was adopted, and appellee in good faith, with no notice of any design, if such existed, to decrease the capital stock of the corporation, fulfilled his part of the contract, and then had his claim for payment of his promissory note denied him only because of the ill will of the president of the corporation. After bad management, strife, and dissension had lowered the value of his shares, he is met with the demand to pay back what he had already obtained on his shares, and informed that when that is done his worthless shares of stock will be returned. That kind of a proposition has no ring of upright dealing and equity about it.

If there had been no resolution to the effect that the shares of stock should not be merged by the purchase, it is well-settled law that they would not. "When a corporation buys shares of its own capital stock, the capital stock is not reduced by that amount, nor is the stock merged." Cook on Corp. § 314; Vail v. Hamilton, 85 N.Y. 453; Jefferson v. Burford (Ky.) 17 S.W. 855; Commonwealth v. Railroad, 142 Mass. 146,7 N.E. 716; Ralston v. Bank, 112 Cal. 208, 44 P. 476. It follows that the purchase of the shares of stock by appellant did not reduce or decrease its capital stock and the transaction could not be brought within the purview of article 1152.

Speaking on the effect the purchase of its own stock has on the corporation, Clark Marshall in Private Corporations, § 411, state: "It has been held that a corporation cannot purchase its own shares for the purpose of holding them, on the ground that the purchase by a corporation of its own shares in effect reduces its capital stock to that extent until the shares are reissued. Strictly speaking, however, this is not in any sense a reduction of the capital stock." The same authors state: "When a corporation purchases shares of its own stock, as it may lawfully do under some circumstances, and as it may also do unlawfully, the shares are not thereby merged or extinguished unless such is the intention. If it does not intend to retire the shares, they merely remain in suspension as it were and may be at any time reissued." See, also, section 199.

Machen, in his work on Corporations, while attempting to uphold a contrary doctrine, says: "It must be conceded that a somewhat larger number of the American courts have taken the view that a corporation may, without express statutory authority, purchase its own shares, provided the purchase is entered into bona fide and does not endanger the claims of creditors." Section 628, and long list of authorities in note. The author, however, indorses the English view of the question because it "is supported by the weight of Mr. Morawetz's opinion." This court, however, feels disposed to follow the opinions of a majority of American courts, rather than those of English courts, even though the latter have received the sanction of the writer of a text-book. Yet this author admits that when shares of a corporation are purchased they are only temporarily merged or extinguished. Machen, Corp. § 633.

Even Morawetz, who arrays his opinion against that of a majority of American courts, including that of the Supreme Court of the United States, says: "If shares in a corporation are purchased by the company, they may, unless the contrary be provided, be issued at a subsequent time. Under these circumstances, it is said, the shares do not become merged, but remain temporarily in abeyance and may be sold again by the corporation." In spite of that he contends that "it would be an absurdity to say that a corporation can really hold shares in itself."

In the case of Knickerbocker Co. v. State Board, 74 N.J. Law, 583, 65 A. 913, 7 L.R.A. (N. S.) 885, it was held that shares of stock once issued remain oustanding until retired in the legal manner, and therefore, when a corporation bought its stock, it was not retired or merged.

In the case of Pabst v. Goodrich, 133 Wis. 43, 113 N.W. 398, 14 Ann.Cas. 824, it was held a solvent corporation has the right to purchase and hold its stock, and that such purchase does not amount to a cancellation of such stock. It says further: "A corporation clearly has the right to purchase its stock, keep it alive, and treat it as assets."

Where the owner of stock transfers it directly to the corporation itself, without the intervention of a trustee, the transferror is not released from his liability on the stock, but remains as fully chargeable as though no transfer had been attempted. Cook on Corp. § 251; Machen, Corp. § 631; In re Reciprocity Bank, 22 N.Y. 9; Chrisman v. Independence Mfg. Co., 168 Mo. 634, 68 S.W. 1026: Walters v. Porter,3 Ga. App. 73, 59 S.E. 452. We cannot see where any question of public policy could arise; no one can be injured by the transfer of the shares of stock.

The motion for rehearing is overruled.