Allen v. Biltmore Tissue Corp.

• Decision Date: 04 April 1957
• Citation: Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 161 N.Y.S.2d 418, 141 N.E.2d 812, 61 A.L.R.2d 1309 (N.Y. 1957)
• Parties: , 141 N.E.2d 812, 61 A.L.R.2d 1309 Melvin K. ALLEN et al., as Executors of and Trustees under the Will of Harry N. Kaplan, Deceased, Respondents, v. BILTMORE TISSUE CORPORATION, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 418

161 N.Y.S.2d 418

2 N.Y.2d 534, 141 N.E.2d 812, 61

A.L.R.2d 1309

Melvin K. ALLEN et al., as Executors of and Trustees under the Will of Harry N. Kaplan, Deceased, Respondents, v.BILTMORE TISSUE CORPORATION, Appellant.

Court of Appeals of New York.

April 4, 1957.

Albert L. Solodar and Max Wechsler, New York City, for appellant.

Irvin Waldman, New York City, for respondents.

FULD, Judge.

The by-laws of defendant corporation give it an option to purchase, in case of the death of a stockholder, his shares of the corporate stock.The enforcibility of this option is one of the questions for decision.

Biltmore Tissue Corporation was organized under the Stock Corporation Law, Consol.Laws, c. 59, § 1 et seq., in 1932, with an authorized capitalization of 1,000 shares without par value, to manufacture and deal in paper and paper products.The by-laws, adopted by the incorporators-directors, contain provisions limiting the number of shares (originally 5, later 20) available to each stockholder ( § 28) and restricting stock transfers both during the life of the stockholder and in case of his death ( §§ 29,30).Whenever a stockholder desires to sell or transfer his shares, he must, according to one by-law ( § 29), give the corporation or other stockholders 'an opportunity to repurchase the stock at the price that was paid for the same to the Corporation at the time the Corporation issued the stock'; if, however, the option is not exercised, 'then, after the lapse of sixty days, the stock may be sold by the holder to such person and under such circumstances as he sees fit.'The by-law, dealing with the transfer of stock upon the death of a stockholder ( § 30) the provision with which we are here concerned is almost identical.It recites that the corporation is to have the right to purchase its late stockholder's shares for the price it originally received for them:

'Stock Transfer in Case of Death.In case of the death of any stockholder, the Corporation shall have the right to purchase the stock from the legal representative of the deceased for the same price that the Corporation received therefor originally.If the Corporation does not, or cannot, purchase such stock, the Board of Directors shall have the right to empower such of its existing stockholders as it sees fit to make such purchase from such legal representative at the same price.Should the option provided for in this section not be exercised, then, after the lapse of ninety days, the legal representative may dispose of said stock as he sees fit.'

Harry Kaplan, a paper jobber, was one of Biltmore's customers and some months after its incorporation purchased 5 shares of stock from the corporation at $5 a share.In 1936, Kaplan received a stock dividend of 5 more shares, and two years later purchased an additional 10 shares for $100.On the face of each of the three certificates, running vertically along the left-hand margin, appeared the legend,

'Issued subject to restrictions in sections 28,29, and30 of the By-laws.'

On October 20, 1953, Kaplan wrote to the corporation stating that he was 'interested in selling' his 20 shares of stock and requesting that he be given the 'price' which the board of directors 'will consider, so that I may come to a decision.'He died five days later.Some months thereafter, in February, 1954, his son, who was also one of his executors, addressed a letter to Biltmore, inquiring whether it was 'still interested in acquiring shares and at what price.'By another letter, dated the same day, the attorney for the executors sent to the corporation the three stock certificates, representing the 20 shares, and requested that a new certificate be issued in the name of the estate or the executors.Within 30 days, on March 4, 1954, Biltmore's board of directors voted to exercise its option to purchase the stock, pursuant to section 30 of the by-laws, and about three weeks later the executors' attorney was advised of the corporation's action.He was also informed that, although the by-law provision permitted purchase at 'the same price that the company received therefor from the stockholder originally,' the corporation had, nevertheless, decided to pay $20 a share, 'considerably more than the original purchase price', based on the prices at which it had acquired shares from other stockholders.

Kaplan's executors declined to sell to the corporation, insisting that the stock which had been in the decedent's name be transferred to them.When their demand was refused, they brought this action to compel Biltmore to accept surrender of the decedent's stock certificate and to issue a new certificate for 20 shares to them.They contended, and the contentions are repeated on this appeal, that the legend on the certificate fails to meet the requirement of section 176 of the Personal Property Law, Consol.Laws, c. 41, that a restriction on transfer be 'stated upon the certificate' and that the by-law is void as an unreasonable restraint.The corporation interposed a counterclaim for specific performance based on the exercise of its option to purchase the shares under by-law section 30.The court at Special Term granted judgment to the corporation on its counterclaim and dismissed the complaint.The Appellate Division reversed, rendered judgment directing the transfer of the stock to the plaintiffs and dismissed the defendant's counterclaim upon the ground that the by-law in question is void.

Section 176 of the Personal Property Law, which is identical with section 15 of the Uniform Stock Transfer Act, provides that 'there shall be no restriction upon the transfer of shares' represented by a stock certificate 'by virtue of any by-law of such corporation, or otherwise unless the * * * restriction is stated upon the certificate.'(Emphasis supplied.)In order to comply with this statutory mandate, the corporation printed the words, 'Issued subject to restrictions in sections 28,29, and30 of the By-laws,' on the side of the certificate.The plaintiffs maintain that this is not a proper 'statement,' that the restriction must be set out verbatim or in substance.There is no such prescription in the statute, and the courts have found noncompliance only where the stock certificate gives no notice whatever of the restriction sought to be enforced.See, e. g., Petts v. Manhasset Civil Engineers, 4 Misc.2d 683, 68 N.Y.S.2d 338;Security Life & Acc. Ins. Co. v. Carlovitz, 251 Ala. 508, 212-513, 38 So.2d 274;Costello v. Farrell, 234 Minn. 453, 465, 48 N.W.2d 557, 29 A.L.R.2d 890;Magnetic Mfg. Co. v. Manegold, 201 Wis. 154, 157, 229 N.W. 544.The word 'stated' sanctions a notation indicating where the restriction appears and permits incorporation by adequate reference.In other words, a restriction is sufficiently 'stated' by a legend noting that the stock is 'issued subject to restriction' and specifying where its full text may be found.See, e. g., Bloomingdale v. Bloomingdale, 107 Misc. 646, 649-650, 177 N.Y.S. 873, 874;Weissman v. Lincoln Corp., Fla., 76 So.2d 478, 483-484(with the result of which, though not its reasoning, we agree);Longyear v. Hardman, 219 Mass. 405, 407, 106 N.E. 1012;see, also, Penthouse Properties v. 1158 Fifth Ave., 256 App.Div. 685, 688-689, 11 N.Y.S.2d 417, 419-420; 12 Fletcher's Cyclopedia Corporations (Perm. ed., 1932), § 5479, p. 277.¹In this connection, it is significant that, where the legislature wished the words of a restriction or its substance to be actually printed on the certificate, it used language to express that throught.Thus, section 66 of the Stock Corporation Law recites that, 'If a stockholder shall be indebted to the corporation, the directors may refuse to consent to a transfer of his stock until such indebtedness is paid, provided a copy of this section or the substance thereof is written or printed upon the certificate of stock.'(Emphasis supplied.)

Since, then, the legend on the certificate meets the statute's requirements, we turn to the validity of the by-law restriction.

The validity of qualifications on the ownership of corporate shares through restrictions on the right to transfer has long been a source of confusion in the law.The difficulties arise primarily from the clash between the concept of the shares as 'creatures of the company's constitution and therefore * * * essentially contractual choses in action'(Gower, Some Contrasts between British and American Corporation Law, 69 Harv.L.Rev. 1369, 1377) and the concept of the shares as personal property represented so far as possible by the certificate itself and, therefore, subject to the time-honored rule that there be no unreasonable restraint upon alienation.While the courts of this state and of many other jurisdictions, as opposed to those of England and of Masscahusetts (Gower, supra, 69 Harv.L.Rev. 1369, 1377-1378;O'Neal, Restrictions on Transfer of Stock in Closely Held Corporations, 65 Harv.L.Rev. 773, 778), have favored the 'property' concept (seeO'Neal, supra, 65 Harv.L.Rev. 773, 779), the tendency is, as section 176 of the Personal Property Law implies, to sustain a restriction imposed on the transfer of stock if 'reasonable' and if the stockholder acquired such stock with requisite notice of the restriction.

The question posed, therefore, is whether the provision, according the corporation a right or first option to purchase the stock at the price which it originally received for it, amounts to an unreasonable restraint.In our judgment, it does not.

The courts have almost uniformly held valid and enforcible the first option provision, in charter or by-law, whereby a shareholder desirous of selling his stock is required to afford the corporation, his fellow stockholders or both an opportunity to buy it before he is free to offer it to outsiders.See, e. g., Penthouse Properties v. 1158 Fifth Ave., supra, 256 App.Div. 685, 11 N.Y.S.2d 417;Hassel v. Pohle, 214 App.Div. 654, 212 N.Y.S....