First Alabama Bancshares, Inc. v. McGahey

• Decision Date: 02 December 1977
• Citation: First Alabama Bancshares, Inc. v. McGahey, 355 So.2d 681 (Ala. 1977)
• Parties: 1977-2 Trade Cases P 61,799 FIRST ALABAMA BANCSHARES, INC. v. Hayse McGAHEY. SC 2416.
• Court: Alabama Supreme Court

Page 681

355 So.2d 681

1977-2 Trade Cases P 61,799

FIRST ALABAMA BANCSHARES, INC. v. Hayse McGAHEY.

SC 2416.

Supreme Court of Alabama.

Dec. 2, 1977.

As Corrected On Denial of Rehearing March 3, 1978.

Lawrence B. Clark and Reid B. Barnes, Birmingham, for appellant.

Ralph Smith, Jr., Guntersville, for appellee.

T. J. Carnes, of Carnes & Carnes, Albertville, for intervenors.

JONES, Justice.

This appeal arises from the denial of an injunction sought by Appellant, First Alabama Bancshares, Inc., to enforce an alleged covenant not to compete between itself and Appellee, Hayse McGahey, a past director, president and stockholder of the Citizens Bank of Guntersville. Citizens Bank, subsequent to the date the covenant was made, merged into the Bank of Guntersville, a wholly-owned subsidiary of Bancshares, created solely as a vehicle to acquire Citizens Bank.

The principle question raised concerns whether the exchange of stock involved in a merger constitutes a "sale" of good will within the meaning of Tit. 9, § 23, Code (§ 8-1-1, Code of Ala. 1975). If our answer to this question is in the affirmative, a covenant not to compete will be recognized under such circumstances. The trial Court, basing its interpretation upon federal taxing statutes, held that the merger could not be considered a "sale." We reverse and remand.

Title 9, § 23, provides that:

One who sells the good will of a business may agree with the buyer . . . to refrain from carrying on or engaging in a similar business and from soliciting old customers . . . within a specified county, city, or part thereof, so long as the buyer or any person deriving title to the good will from him . . . carries on a like business therein.

We are called upon to interpret the language of this section which is an exception to the more general proposition contained in Tit. 9, § 22, Code, that contracts in restraint of trade are, to that extent, void. See also 54 Am.Jur.2d Monopolies, § 522.

Before we may reach this question, however, we must determine whether an individual stockholder has a vendible interest in the good will of a corporation. This appears to be a question of first impression in this jurisdiction. Therefore, and because a more complete understanding of the facts may prove enlightening, a brief recitation of the facts is appropriate.

By agreement dated December 29, 1972, McGahey, and other directors of Citizens Bank, agreed not to compete with Bancshares should a subsequent plan of merger between Citizens Bank and the Bank of Guntersville be approved. The two conditions upon which this agreement was based were that the plan had to be approved by the Internal Revenue Service as a tax-free exchange; and that all the terms of the "Plan of Reorganization," of which the covenant not to compete was a part, must be fulfilled. One additional clause of that plan was that the merger and exchange of stock would be effective only if 80% Of Citizens Bank's common stockholders approved the merger offer. McGahey agreed not to "directly or indirectly enter the banking business in Guntersville, Alabama, for a period of five (5) years from the date on which the exchange (was) declared effective."

A second agreement, a "Plan of Merger," was executed by Citizens Bank, the Bank of Guntersville and Bancshares on November 13, 1973. On February 20, 85% Of Citizens Bank's shareholders voted to ratify the Plan of Merger. (Thus, all requisites of the Plan of Reorganization were fulfilled because the IRS had previously approved the transaction as being tax-free.) The F.D.I.C. approved the merger, and, on April 1, 1974, the merger of Citizens Bank and the Bank of Guntersville became effective.

McGahey served as director and president of the successor bank for approximately one year after the merger, at which time he voluntarily resigned and became president of the Security Bank and Trust Company of Arab, Alabama. He continued at this position from April, 1975, until May, 1976.

In May, McGahey left Security Bank and re-entered the banking business in Guntersville by seeking to establish the Home Bank of Guntersville. It is this participation in the organization of Home Bank which led to the instant suit.

The rule in California, relied upon by McGahey, is that the good will of a corporation is the property of that corporate entity, and can be transferred only by it. Dodge Stationery Co. v. Dodge, 145 Cal. 380, 78 P. 879 (1904); and Merchants Ad-sign Co. v. Sterling, 124 Cal. 429, 57 P. 468 (1899).

This proposition, however, overlooks the well-settled rule in Alabama that the stockholders of a corporation are the equitable owners of its assets. Williams v. North Ala. Express, 263 Ala. 581, 83 So.2d 330 (1955). Therefore, because the good will of a corporation is a corporate asset, a stockholder is the equitable owner of that good will in the proportion that his shares bear to the total outstanding shares of stock in the corporation. Or, as specifically held in Wylie v. Wylie Permanent Camping Co., 57 Mont. 115, 187 P. 279 (1920), "Good will is not a thing apart, but an incident to and inherent in the thing itself the business."

The view we have taken is followed by other states which have considered this question. In Bessel v. Bethke, 56 N.D. 1, 215 N.W. 868, 869 (1929), it was stated:

"Where one sells his stock he necessarily disposes of his interest in the good will of the business conducted by the corporation to the same extent as he parts with his interest in any other property of the corporation."

See also Public Opinion Publishing Co. v. Ransom, 34 S.D. 381, 148 N.W. 838 (1913); Buckhout v. Witwer, 157 Mich. 406, 122 N.W. 184 (1909); and 54 Am.Jur.2d, Monopolies, § 526.

In Key v. Perkins, 173 Okl. 99, 46 P.2d 530, 532 (1935), statutes and facts were similar to the instant case. After examining the above-noted cases, as well as the California rule, the Court stated:

"As we view it, the weight of authority and sound reasoning and logic support the contention that the owner of an appreciable...