Gaines v. Long Mfg. Co.

• Decision Date: 31 October 1951
• Docket Number: No. 100,100
• Citation: 67 S.E.2d 355,234 N.C. 331
• Court: North Carolina Supreme Court
• Parties: GAINES, v. LONG MFG. CO., Inc. et al.

Page 355

67 S.E.2d 355

234 N.C. 331

GAINES, v. LONG MFG. CO., Inc. et al.

No. 100

Supreme Court of North Carolina.

Oct. 31, 1951

Ruark & Ruark and Joseph C. Moore, Jr., Raleigh, and Battle, Winslow, Merrell & Taylor, Rocky Mount, for plaintiff, appellee.

Henry C. Bourne, Tarboro, for defendants, appellants.

JOHNSON, Justice.

The defendants by demurring to the sufficiency of the complaint to state a cause of action admit as true every material fact properly alleged. Gaines v. Long Manufacturing Company, Inc., N.C., 67 S.E.2d 350; Hall v. Cable Dairies, Inc., N.C., 67 S.E.2d 63; Bryant v. Little River Ice Co., 233 N.C. 266, 63 S.E.2d 547. Under the Code system of pleading which prevails in this jurisdiction, it is settled policy that actions shall be tried upon their merits, and to that end pleadings are construed liberally, with every reasonable intendment being adopted in favor of the pleader, so that a pleading will not be overthrown by a demurrer unless it be wholly insufficient. "If in any portion of it, or to any extent, it presents facts sufficient to constitute a cause of action, or if facts sufficient for that purpose can be fairly gathered from it, the pleading will stand, * * *. It must be fatally defective before it will be rejected as insufficient.' ' Hoke v. Glenn, 167 N.C. 594, 83 S.E. 807, 808; North Carolina Corp. Comm. v. Harnett County Trust Co., 192 N.C. 246, 134 S.E. 656.

In substance, the pertinent facts alleged in the complaint are these:

1. That the defendant, Long Manufacturing Company, Inc., was chartered under the laws of North Carolina September 13, 1946, with an authorized capital stock of 1,000 shares of $100 par value each. The corporation began business with an original paid-in capital of only $1,000, represented by 10 shares of stock. No further stock has ever been issued. The original ten shares are now outstanding. The plaintiff owns two shares, with the remaining eight shares being owned by these defendants, in the proportions as indicated: W. R. Long, six shares; John G. Long, one share; and Mary Ellen Forbes, one share.

2. The plaintiff paid full value for his two shares of stock and served as Secretary and Treasurer of the corporation from the time of its organization in 1946 until June 30, 1949, when he resigned, and since that time he has not been an officer of the corporation.

3. The defendants W. R. Long, John G. Long, and Mary Ellen Forbes (who are brothers and sister) constitute the present board of directors of the corporation. They were elected at the January 8, 1951, annual meeting of the stockholders. At the meeting of the board of directors held the same day, W. R. Long was elected President; John G. Long was elected Vice-President; and J. O. Hall (although being neither a director nor a stockholder) was elected Secretary and Treasuer of the corporation.

4. The corporation has prospered from its inception; for the fiscal year ending October 31, 1947, the first year of operations, net profits after all taxes were $193,707.62; for the year ending October 31, 1948, net profits after taxes amounted to $32,142.57; for the year ending October 31, 1949, net profits after taxes were $19,317.43; and for the year ending October 31, 1950, net profits after taxes were $50,367.05.

At the end of the fiscal year October 31, 1950, the corporation had current assets of $352,130.24, including cash on hand in banks of $146,124.92. At that time the corporation had paid-in capital and earned suprlus of $296,387.47 'and was amply solvent and was not in need of any additional operating capital'; that at the time of the commencement of this suit the financial condition of the corporation was substantially the same as on October 31, 1950.

5. At the January 8, 1951, annual meeting of the stockholders of the corporation two resolutions 'were introduced by the defendant John G. Long and carried by the votes of the defendants W. R. Long, John G. Long and Mary Ellen Forbes, over the protest(s) of the plaintiff, who was present and voted his 2 shares of stock against said resolutions.'

The first resolution recites that whereas the books of the corporation show as of October 31, 1950, an earned surplus of $295,387.47, nevertheless the corporation 'is badly in need of additional working capital to carry on its business.' And, thereupon, the resolution directs the payment from earned surplus of a dividend of six per centum on the outstanding capital stock to stockholders of record as of January 8, 1951, (amounting in all to $60, with further direction 'that the remaining part of the surplus fund in the amount of $295,327.47 is hereby fixed and designated by the stockholders as working capital of said corporation.'

The second resolution recites in substance that the defendant corporation at its inception and during subsequent years was and has been short of working capital and that funds for capital investment and operations were advanced by W. R. Long, trading as Long Supply Company, and subsequently Long Supply Company, Inc., and that on October 31, 1950, these advances to the defendant corporation amounted to $100,338.06. The resolution further recites that the remaining unissued authorized capital stock of the defendant corporation should be issued and sold for the purpose of paying off this indebtedness due Long Supply Company, Inc. And, thereupon, the resolution directs that the remaining 990 shares of unissued capital stock be issued and sold at not less than $100 per share, and that the indebtedness due the Long Supply Company, Inc., be paid out of the proceeds. The resolution further directs that each stockholder of the defendant corporation shall be entitled to subscribe for 99 shares of the new stock for each share owned as of January 8, 1951, and that each stockholder be allowed to subscribe and pay for the new stock at $100 per share. The resolution contains a forfeiture provision providing in effect that a failure on the part of any stockholder, his heirs or assigns, to exercise this pre-emptive right on or before 10 o'clock a. m., February 10, 1951, shall work a forfeiture or waiver of the right to subscribe for such additional stock, with the directors being authorized to make sale of such remaining stock.

6. That after the adoption of the aforesaid resolutions at the January 8, 1951, meeting of the stockholders of the corporation, the plaintiff, by written communications delivered by special delivery, U. S. Mail, on or about February 26, 1951, to W. R. Long, President of the defendant corporation, and to all of the other directors of the corporation, demanded that a meeting of the stockholders be called immediately, as allowed by the By-laws, to consider rescission of the former action of the stockholders in undertaking to set aside as working capital the entire earned surplus of the corporation, and further to consider the declaration of dividends in accordance with a proposed, or alternate, resolution to be submitted to the meeting by the plaintiff, copies of which proposed, and alternate, resolutions were transmitted to each director with the written demand for call of a stockholders meeting. The proposed resolutions are incorporated in the complaint. They contain the following recitals: 'Whereas, it is desirable that the corporation's debt to Long Manufacturing Company of $100,338.06 as of October 31, 1950, be paid;

'And Whereas the payment thereof out of earned surplus will leave a surplus of $195,049.41 as of the same date;

'And Whereas the payment of cash dividends in the sum of $25,000 would leave remaining a working capital of $122,600 (cash, receivables and inventories of $233,400 against current liabilities of $110,800, a ratio of more than 2 to 1);

And Whereas such working capital is sufficient for the needs of the business;

'And Whereas the resolution adopted January 8, 1951, directing the issuance of $99,000 in new stock for cash was improvident, and its execution would result in overcapitalizing the business, and leaving large funds idle a good part of each year, and would further result in the destruction of a major part of the interest in the corporation of any stockholder not exercising his pre-emptive right to subscribe to the new stock;'

The proposed resolution then resolves and directs:

'(1) That so much of the resolution of January 8, 1951, as sets aside $295,327.47 as working capital be rescinded.

'(2) That the officers and directors are directed to pay a dividend of two thousand four hundred ninety-four per cent (2,494%) on the outstanding stock, from earned surplus, to stockholders of record January 8, 1951, amounting to $24,940.00, in addition to the $60 in dividends declared January 8, 1951.

'(3) That the debt of Long Supply Company be paid out of the $146,000 cash on hand October 31, 1950.

'(4) That $122,600 be set aside as working capital.

'(5) That the resolution of January 8, 1951, directing the issuance of new stock, 990 shares for $99,000 cash, be, and the same is hereby rescinded.'

The alternate resolution proposed by the plaintiff for consideration on failure of the adoption of the foregoing proposed resolution, provides.

'(1) That the resolution of January 8, 1951, directing the issuance of 990 shares of new stock for $99,000 cash be rescinded.

'(2) That the directors proceed to increase the authorized capital stock to 4,000 shares of $100 par value each.

'(3) That a stock dividend of $295,000 be then declared, out of earned surplus, making the capital $296,000 consisting of 2960 shares.

'(4) That if additional working capital then be found necessary, the directors be authorized to issue and sell 1,000 new shares for $100 cash each, to the stockholders of record according to their preemptive rights, or on their waiver, to other persons.'

7. That the officers and directors of the corporation have failed to consider the foregoing resolutions and proposals of the plaintiff, and 'they have failed to call a...