Baum v. Baum Holding Co.

• Decision Date: 19 February 1954
• Docket Number: No. 33454,33454
• Citation: 62 N.W.2d 864,158 Neb. 197
• Parties: BAUM et al. v. BAUM HOLDING CO. et al.
• Court: Nebraska Supreme Court

Page 864

62 N.W.2d 864

158 Neb. 197

BAUM et al. v. BAUM HOLDING CO. et al.

No. 33454.

Supreme Court of Nebraska.

Feb. 19, 1954.

Syllabus by the Court.

1. If a purported corporation has no existence, either de jure or de facto, it is subject to collateral attack by private persons as well as the state.

2. If, however, a company has corporate existence, either de jure or de facto, a suit questioning its corporate capacity must be by direct attack by the state by quo warranto proceedings.

3. In order for a de facto corporation to exist there must be a statute authorizing a corporation de jure.

4. A purported corporation having no authority for its existence by statute may become a de facto corporation by the amendment of the statute authorizing the organization for the objects and purposes for which it was purported to have been organized in the first instance, where there has been a colorable compliance with its requirements and an actual user of corporate power.

5. The power granted by section 21-1,141, R.S.1943, for corporations to own and hold capital stock of another corporation is an independent as distinguished from an incidental power.

6. A corporation owning and holding stock in another corporation is authorized to vote such stock by the express provisions of section 21-1,141, R.S. 1943.

7. When a company is made a party defendant in a suit questioning its existence as a corporation, it is a recognition of its corporate existence.

8. The stock owned by a corporation may be voted as directed by a majority of the stockholders of the corporation.

9. Provisions contained in the articles of incorporation may be sustained as a contractual obligation, though they may appear invalid as an infringement upon the right of ownership of property.

10. The organization of a holding company for the express purpose of gaining control of another corporation is not an unlawful object.

11. Majority stockholders may be held responsible in a proper action for fraud or a breach of trust toward minority stockholders.

12. The majority stockholders and directors are required to comply with the articles of incorporation with respect to the distriction of earnings and, upon failure to so comply, they will be compelled to do so at the suit of the corporation or an injured stockholder.

Kennedy, Holland, DeLacy & Svoboda, Omaha, for appellants.

King, Haggart & Kennedy, Omaha, for appellees.

Heard before SIMMONS, C. J., and CARTER, YEAGER, CHAPPELL, WENKE, and BOSLAUGH, JJ.

CARTER, Justice.

This is an action for a declaratory judgment declaring the rights, status, and other legal relations of the Baum Realty Company, and the Baum Holding Company, and the stockholders of each, with relation to the facts pleaded in the petition, and praying for an injunction and other equitable relief. The trial court sustained a demurrer to the petition and dismissed the action. Plaintiffs appeal.

As a matter of convenience the Baum Realty Company will be referred to as the realty company and the Baum Holding Company will be designated as the holding company.

On February 18, 1922, the realty company was incorporated under the laws of this state. Its incorporation appears to have been the result of a disagreement between David A. Baum and the heirs of James E. Baum. The stockholders were all members of the Baum family who were the owners of the Bennett Building at Sixteenth and Harney Streets in Omaha and the adjoining garage property at Seventeenth and Howard Streets. The purpose of the incorporation of the realty company was to place the ownership and management of these properties in the hands of a corporation as a matter of convenience. Stock was issued in the amount of 1,237 shares to the members of the family in proportion to their interests in the property. It is important to note that David A. Baum and members of his immediate family became the owners of less than a majority of the stock of the realty company.

It appears from the petition that David A. Baum, Daniel Baum, Charles L. Baum, and Margaret Greer Baum, shortly after the incorporation of the realty company, organized the holding company. The four of them owned 620 shares of stock in the realty company, a majority of the stock of the latter company. Each assigned his shares of stock in the realty company to the holding company and received in exchange therefor an equal number of shares of holding company stock. The 620 shares of realty company stock constitute the total assets of the holding company, and under its articles of incorporation it can have no assets other than the realty company stock.

The articles of incorporation of the holding company state that the purpose of its organization was 'to acquire, own and hold 620 shares of the par value of $100 per share of Baum Realty Company, a Nebraska corporation.' The articles also provided: 'The corporation shall have power to purchase additional shares of stock of said Baum Realty Company but shall not have power to sell, transfer, assign or otherwise dispose of any stock of Baum Realty Company acquired, owned, held, or controlled by it at any time except as hereinafter provided for in these articles.' It was provided elsewhere in the articles that 'The property of this corporation may be sold as a whole but not in part, and only by consent of at least 2/3rds of the outstanding stock of the corporation.' It was further provided that the articles could not be amended except upon a vote 'of at least 2/3rds of the outstanding stock.' The petition further alleges that David A. Baum and his daughter, Margaret Greer Baum, owned more than two-thirds of the stock of the holding company at the time it was organized, and that the defendants other than the holding company, the State of Nebraska, and the Attorney General of the State of Nebraska, are the successors in interest and the present owners of the stock owned by David A. Baum and Margaret Greer Baum when the holding company was organized.

The petition alleges that it appears in the face of the articles of incorporation of the holding company that it was the purpose of David A. Baum to create a holding company to hold a majority of the shares of stock of the realty company, which he could control by virtue of his ownership of a majority of the holding company stock. By this device, it is alleged, he could vote the 620 shares of realty company stock owned by the holding company and thereby control completely both corporations, although he was in fact a minority stockholder in the realty company. The minority stockholders question the right of the majority stockholders of the holding company to thus control the realty company and, more particularly, to do the following: (a) To cast the vote of 620 shares of realty company stock held by the holding company as a unit, regardless of the wishes of the other stockholders of the holding company, (b) to sell or prevent the sale of all or any part of said 620 shares of the stock of the realty company, (c) to control absolutely the affairs of the realty company through their power to elect a majority of its board of directors, (d) to control absolutely the affairs of the holding company through their power to elect a majority of its board of directors, and (e) to prevent any amendment of said articles that would tend to change the situation.

It is the contention of the defendants that plaintiffs, as stockholders in the holding company, cannot question the validity of the holding company as a corporation. The answer to this question turns on whether or not the holding company is a corporation, either de jure or de facto. If the holding company has no existence, either de jure or de facto, it is subject to collateral attack and plaintiffs can properly question it as a legal entity in the manner here sought. But if the holding company is a corporation, de jure or de facto, a suit to destroy it must be by direct attack by the state by quo warranto proceedings. Parks v. James J. Parks Co., 128 Neb. 600, 259 N.W. 509.

It is urged by the plaintiffs that corporations in this state were not permitted to hold and own stock in another corporation at the time the holding company was organized. We assume, without deciding the question, that this was true. In 1941, however, the Legislature enacted Chapter 41, section 77, Laws 1941, now section 21-1,141, R.S.1943, which provides: 'Any corporation operating or organized under this article may guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of, the shares of the capital stock of, or any bonds, securities or evidence of indebtedness created by any other corporation or corporations of this state or any other state, country, nation or government, and while owner of said stock may exercise all the rights, powers, and privileges of ownership including the right to vote thereon.'

The defendants contend that with the adoption of section 21-1,141, R.S.1943, the power to organize a corporation to hold the stock of another was specifically granted and from and after that enactment, a de jure corporation could exist. The petition shows that the holding company carried on as a corporation many years after 1941.

Officers were elected and dividends were paid. Plaintiffs recognized the holding company as a corporation until the difficulties arose which brought about this suit. We agree with the defendants that the enactment of section 21-1,141, R.S.1943, was sufficient authority to organize a de jure corporation for the holding of stock in another corporation and, consequently, it affords a sufficient basis for a holding that the holding company was a de facto corporation after its enactment.

The Illinois court had a somewhat similar question before it in Lewis v. West Side Trust & Savings Bank, 376 Ill. 23, 32 N.E.2d 907, 918. In that case it appeared that when the original corporation was formed there was no statutory authority for it to invest in...