Bixby v. Pierno

• Citation: 481 P.2d 242,93 Cal.Rptr. 234,4 Cal.3d 130
• Court: United States State Supreme Court (California)
• Decision Date: 23 February 1971
• Parties: , 481 P.2d 242, Blue Sky L. Rep. P 70,900 Fred H. BIXBY, Plaintiff and Appellant, v. Anthony R. PIERNO, as Commissioner of Corporations, etc., Defendant and Respondent, FRED H. BIXBY RANCH COMPANY, Real Party in Interest and Respondent, Robert Bixby Green, Intervener and Appellant. L.A. 29689.

Page 234

93 Cal.Rptr. 234

4 Cal.3d 130, 481 P.2d 242, Blue Sky L. Rep. P 70,900

Fred H. BIXBY, Plaintiff and Appellant, v. Anthony R. PIERNO, as Commissioner of Corporations, etc., Defendant and Respondent, FRED H. BIXBY RANCH COMPANY, Real Party in Interest and Respondent, Robert Bixby Green, Intervener and Appellant.

L.A. 29689.

Supreme Court of California,

In Bank.

Feb. 23, 1971.

Shaw, Miller & Suffin, Stephen H. Suffin, Beverly Hills, Loeb & Loeb and Howard I. Friedman, Los Angeles, for plaintiff and appellant and intervener and appellant.

Thomas C. Lynch, Atty. Gen., Arthur C. de Goede, Deputy Atty. Gen., for defendant and respondent.

Gibson, Dunn & Crutcher, Arthur W. Schmutz, Robert S. Warren and Martin H. Kahn, Los Angeles, for real party in interest and respondent.

TOBRINER, Acting Chief Justice.

In this case we are called upon to determine whether a superior court properly refused to exercise its independent judgment in reviewing a decision of the Commissioner of Corporations approving a recapitalization plan. For the reasons stated herein, we conclude that the judgment must be affirmed: the trial court properly followed our long established approach to the judicial review of a decision of a statewide nonconstitutional agency, and applied to the decision the test of whether or not it was supported by substantial evidence. The trial court correctly found that the commissioner's ruling was supported by substantial evidence and did not constitute an abuse of discretion.

1. The facts.

Plaintiff, Fred H. Bixby, and intervener, Robert Bixby Green, appeal from a judgment denying their petition for writ of mandamus (Code Civ.Proc., § 1094.5) to compel defendant Commissioner of Corporations of the State of California ¹ to set aside his decision approving a recapitalization plan submitted for approval by real party in interest, Fred H. Bixby Ranch Company, a California corporation (hereinafter called 'Ranch Company'). The Ranch Company is a closely held, family-owned corporation with 68,400 shares of capital stock outstanding. Almost all of this stock is owned or held in trust for the children, grandchildren and greatgrandchildren of the corporation's founder, Fred H. Bixby, now deceased. Although no single shareholder owns a majority of the stock, Preston B. Hotchkis, the president and a director of Ranch Company, owns or controls as voting trustee approximately 39 percent of the stock, and his parents, brother and sisters own or control an additional 13 percent. The remaining stock is held primarily by descendants of Fred H. Bixby, such as plaintiff Bixby and intervener Green (hereinafter called minority stockholders), who are not members of the Hotchkis family.

Ranch Company's board of directors (of which president Hotchkis and his father are members) became concerned with the possibility that an outsider, attracted by the high liquidation value of the corporation's stock, might acquire control of the corporation by purchasing stock from the estates of deceased shareholders and thereupon force a liquidation. Although Ranch Company has no provision for redemption of its stock upon death, it has adopted an informal policy of purchasing from the estates of deceased shareholders sufficient shares to enable the estate to meet the costs of death taxes and administration. Upon the last occasion of a shareholder's death, however, an outsider did bid for the shares offered for sale by the estate.

Ranch Company owns substantial real estate holdings and has commenced development of this property through long-term projects. The corporation is managed in part by officers who are not shareholders of the corporation, and the directors believe it is necessary to assure these officers that Ranch Company will be in a position, through continuity and stability of ownership, to carry out its long-term plans.

Consequently, in order to insure the continuity of ownership of this family corporation and to assure the stability of its long-term real estate development projects, the board of directors, by a 3 to 2 vote, adopted, with the approval of approximately 70 percent of the shareholders, a plan of recapitalization. The plan contemplates the creation of a new class of 68,400 shares of nonconvertible, nonvoting preferred stock carrying a cumulative annual dividend of $5 per share and an additional non-cumulative annual dividend of $2 per share. In the event of liquidation, each preferred share will be entitled to receive $400 plus accrued dividends.

The plan also provides for the creation of a new class of 68,400 shares of common stock which, with certain exceptions pertaining to dividend arrearages and liquidation preferences, are to have exclusive voting rights. These new common shares are to be exchanged on a one-for-one basis for the old common shares; the preferred shares will then be issued pro rata as a dividend upon the new common shares.

If the plan is carried out, the distribution of the new common and preferred shares will be in the same proportion as present holdings; each shareholder will possess the same ownership interest, rights, and privileges as he formerly possessed. In the event of a shareholder's death, however, his estate may elect to sell the nonvoting preferred stock to raise funds for the payment of death taxes and expenses of administration, thereby retaining the voting common stock for distribution to his heirs. The plan thereby diminishes the danger that outsiders might obtain control of the corporation by purchase of voting stock upon the death of shareholders.

The minority shareholders in Ranch Company objected to the plan of recapitalization on the ground that its true purpose was to benefit the majority shareholders (presumably the Hotchkis family) by providing them with nonvoting stock which they could sell without relinquishing voting control, thereby perpetuating present management policies. The minority shareholders also point out that the new common and preferred stock had been appraised at separate values which, when combined, was substantially less than the book value of the present common stock, and that subsequent sales of the new preferred stock might create additional tax problems for selling shareholders.

Ranch Company sought from the commissioner a permit to amend its articles in accordance with the plan of recapitalization, and to issue new common and preferred stock pursuant thereto. After a hearing on the matter, at which appellants' objections were fully discussed, the commissioner concluded that the proposed plan of recapitalization was 'fair, just and equitable.' In support of his conclusion, the commissioner found that Ranch Company held large real estate holdings and planned long-term projects to develop that property; that it was desirable to assure Ranch Company's nonshareholder management that there would be sufficient continuity and stability of ownership in the corporation to continue these projects; that the proposed plan would make stock sales to other persons less likely in the event of death; and that the continuity and stability of ownership and management promoted thereby is a proper corporate purpose in a family-held corporation devoted to long-term real estate development.

The commissioner recognized that appraisals of the new stock indicated a decline in value from the present stock, but concluded that this 'possible decline' in value was outweighed by other considerations, and that in any event 'such valuations are not deemed to be especially significant in a company whose assets consist primarily of real estate and which has always been, and intends to remain, a closely-held family corporation.' As for the alleged adverse tax consequences, the commissioner found that the minority shareholders failed to conclusively establish these effects, and concluded that he need not examine the future tax situations of each shareholder in determining whether a proposed stock issuance would be fair, just and equitable.

The minority shareholders then obtained a stay of the commissioner's decision and sought a writ of mandamus from the superior court to annul the decision on the ground that the findings and conclusions failed to support the determination that the plan was fair, just, and equitable. The trial court found that the commissioner's findings and conclusions were supported by substantial evidence and did not constitute an abuse of discretion.

2. Code of Civil Procedure section 1094.5 provides for both an independent judgment and a substantial evidence review of administrative decisions.

Section 1094.5 of the Code of Civil Procedure provides the basic framework by which an aggrieved party to an administrative proceeding may seek judicial review of any final order or decision rendered by a state or local ² agency. Section 1094.5, subdivision (c), does not establish any single standard for judicial review of the evidentiary basis for agency determinations, but simply states: 'Where it is claimed that the findings are not supported by the evidence, in cases in which the court is Authorized by law to exercise its independent judgment on the evidence, abuse of discretion is established if the court determines that the findings are not supported by the Weight of the evidence; and in all other cases abuse of discretion is established if the court determines that the findings are not supported by Substantial evidence in the light of the whole record.' (Italics added.) ³

The Legislature originally enacted section 1094.5 as a codification of the then current approach to the judicial review of administrative decisions by writ of mandamus. (Temescal Water Co. v. Department of Public Works (1955) 44 Cal.2d 90, 105, 280 P.2d 1.) In tracing the origin of section 1094.5, we note that prior to 1936 all administrative decisions were reviewable on writ of certiorari under Code of Civil Procedure section 1068. In Standard Oil Co. v. State Board of...