Bishop v. Middle States Utilities Co. of Delaware

• Decision Date: 15 November 1938
• Docket Number: 44519.
• Citation: 282 N.W. 305,225 Iowa 941
• Parties: BISHOP v. MIDDLE STATES UTILITIES CO. OF DELAWARE.
• Court: Iowa Supreme Court

282 N.W. 305

225 Iowa 941

BISHOP v. MIDDLE STATES UTILITIES CO. OF DELAWARE.

No. 44519.

Supreme Court of Iowa.

November 15, 1938

Appeal from District Court, Clarke County; Homer A. Fuller, Judge.

This is an action at law to recover damages for breach of contract for failure to repurchase certain shares of the capital stock of the defendant in accordance with the terms of an alleged oral contract to do so. The answer set up as a defense that the alleged contract was void and unenforceable because prohibited by the statutes of the State of Delaware under which the defendant was incorporated. A demurrer to this portion of the answer was sustained by the trial court and the defendant elected to stand on its pleading and judgment was entered in favor of the plaintiff for the amount claimed in her petition. Defendant appealed.

Reversed.

C. E Richman, of Cedar Rapids, and Hughes, O'Brien & Hughes of Des Moines, for appellant.

O. M Slaymaker, R. E. Killmar, and D. D. Slaymaker, all of Osceola, for appellee.

HAMILTON, Justice.

The petition is in several counts, some of which were stricken out on demurrer. The gist of the cause of action remaining is that the defendant, a Delaware corporation, authorized and empowered to do business in this state, at various times, through its authorized agents, verbally sold to plaintiff corporate stock of the defendant for which the plaintiff paid cash; that as a part of said transaction said agents verbally agreed that the defendant would repurchase said stock from the plaintiff, if plaintiff requested it at any time within three years from the date of said sale, and would pay plaintiff therefor par, less two per cent, plus earned interest to the date of purchase and would at the end of three years from the date of said purchase and at any time thereafter repurchase said stock and pay plaintiff par therefor; that plaintiff requested defendant to repurchase, buy back and purchase said stock at the same time tendering said stock to the defendant which defendant refused; on account of which plaintiff has suffered damages in the sum of $800 for which plaintiff prays for judgment against the defendant with interest and cost.

The answer of the defendant admits it is a corporation duly and legally organized under the laws of the State of Delaware and is authorized to do business as such corporation in the State of Iowa and was so authorized including the right to sell its capital stock and other securities in this state at the time alleged in plaintiff's petition. The answer further states:

" Defendant states that its Certificate of Incorporation contains the following provisions: ‘ To purchase, hold, sell and transfer the shares of its own capital stock; provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital.’

That Statute 1933, Sec. 19, page 925, Chapter 65, Revised Code of Delaware 1915, published by authority of the General Assembly, provides as follows:

‘ Corporation May Purchase, Hold, Sell and Transfer its Own Stock; Not to be Voted:-Every corporation organized under this Chapter shall have the power to purchase, hold, sell and transfer shares of its own capital stock; Provided that no such corporation shall use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of the capital of the corporation; and provided further that shares of its own capital stock belonging to the corporation shall not be voted upon directly or indirectly.’

That said Statute at the times stated in plaintiff's petition and at the time of the incorporation of the defendant company was, and still is, in full force and effect in said state.

That at the times herein mentioned the Courts of the State of Delaware have held and still hold that, interpreting the statute above quoted,

‘ A corporation may not use its funds or property to purchase shares of its own stock when such use will cause an impairment of its capital; that an agreement to purchase shares of stock is unlawful if the enforcement of such an agreement impaired the capital of the company; that a corporation may use only its surplus for the purchase of shares of its own capital stock; ’ and

‘ Any one dealing with the corporation is bound to know the limitations put on it by the statute under which it was created. In the statute the impairment of the " capital" of the company is mentioned. As here used, this means the reduction of the amount of the assets of the company below the amount represented by the aggregate outstanding shares of the capital stock of the company. In other words, a corporation may use only its surplus for the purchase of shares of its own capital stock. " Capital" does not in this connection mean the assets of the company, for, of course, the assets are reduced when any of it is used by a corporation to purchase shares of its own capital stock. It must have some other meaning then. The statute must mean, therefore, that the funds and

property of the company shall not be used for the purchase of shares of its own capital stock when the value of its assets is less than the aggregate amount of all the shares of its capital stock. A use by a corporation of its assets to purchase shares of its own capital stock under such conditions impairs the capital of the company.

As these conditions existed when the contract was made between Harris and the International Radiator Company, the contract is not now enforceable against the assets in the hands of the receiver, and the claim is disallowed.'

In re International Radiator Company, Court of Chancery of Delaware, October 20, 1914, 10 Del.Ch. 358, 92 A. 255, 256.

Defendant avers that at the times alleged in plaintiff's petition as amended relating to a purported agreement to repurchase its own stock, that the Corporation had no surplus; that the use of its funds or property for the purchase of its own shares of capital stock would have caused an impairment of the capital of the corporation, and avers said purported agreement to repurchase plaintiff's shares of stock is unenforceable and void. Defendant further alleges that said purported agreement to purchase plaintiff's stock was and is contrary to the provisions of the Certificate of Incorporation of the corporation, contrary to the statute and law of the State of Delaware and contrary to the contract between the plaintiff stockholder and the corporation, prejudicial to the interests of other stockholders and unenforceable and void. * * *"

To the foregoing portion of the answer quoted, the plaintiff demurred upon nine separate grounds, as follows:

" 1st. That such provisions, if any, have no force or effect in this state and would not be binding on plaintiff and would be no defense to her claim.

2nd. That such provisions, if any, would be void and unenforceable.

3rd. That the agreement made and relied upon in plaintiff's petition as amended and relied on in this case was part of the contract of purchase and would not be controlled by things claimed in the answer.

4th. That the agreement made and relied on in plaintiff's petition as amended was the purchase of the defendant's stock and at the same time defendant agreed to return plaintiff's money any time and to do so would not be a purchase of the stock as claimed in the defendant's answer.

5th. That the stock plaintiff purchased and which is claimed of her is not such capital stock as the defendant had described in its answer.

6th. That the return of plaintiff's money and taking back said stock would not be impairment of the defendant's capital and would only be a return of plaintiff's money which the defendant agreed to return when she wanted it.

7th. That such allegations so contained in said answer are immaterial to any and all issues in this case and constitute and are no defense to plaintiff's petition and cause of action.

8th. That plaintiff demurs to each and all of the allegations of the answer complained of above for each and all of the reasons urged aforesaid, and also demurs to each and all of the allegations as a whole, and to each...