Lewis v. H. P. Hood & Sons, Inc.

• Decision Date: 29 September 1954
• Citation: 121 N.E.2d 850,331 Mass. 670,48 A.L.R.2d 383
• Parties: , 48 A.L.R.2d 383 Harold M. LEWIS v. H. P. HOOD & SONS, Inc., & others.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 850

121 N.E.2d 850

331 Mass. 670, 48 A.L.R.2d 383

Harold M. LEWIS v. H. P. HOOD & SONS, Inc., & others.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued April 7, 1954.

Decided Sept. 29, 1954.

Joseph B. Ely, Richard Ely and Marcien Jenckes, Boston, for plaintiff.

Warren F. Farr and Charles B. Rugg, Boston, George T. Finnegan, Milton, for defendants.

Before QUA, C. J., and RONAN, WILKINS, SPALDING and COUNIHAN, JJ.

SPALDING, Justice.

The plaintiff brings this bill in equity to enjoin the defendant H. P. Hood & Sons, Inc., hereinafter called the corporation, and its directors, officers, agents and employees from enforcing certain provisions contained in amendments to the agreement of association and articles of organization of the corporation. The judge ruled that the provisions in question were enforceable as a contract between the corporation and the plaintiff, and a decree was entered in accordance with that ruling. The plaintiff appealed.

The judge, on evidence as to which there was no dispute, found as follows: The corporation is a business corporation organized under the laws of this Commonwealth. In 1925 the stockholders of the corporation, including the plaintiff who owned a substantial number of shares of its common stock, voted to amend the agreement of association and articles of organization. These amendments were readopted twice in 1944, the plaintiff voting in favor of such action on both occasions. In each instance the articles of amendment were approved by the commissioner of corporations and taxation and were duly filed in the office of the Secretary of the Commonwealth. See G.L. (Ter.Ed.) c. 156, § 43. The amendments here pertinent were as follows: '(7) By unanimous vote of a full board of directors of the number fixed by the stockholders at their last annual meeting, all or any shares of common stock of the corporation held by such holder or holders as may be designated in such vote may be called at any time for purchase, or for retirement or cancellation in connection with any reduction of capital stock, at the book value of such shares as determined by the board of directors as of the close of the month next preceding such vote. Such determination, including the method thereof and the matters considered therein, shall be final and conclusive. (8) Not less than 30 days prior to the day for which a call of * * * common stock for purchase or for retirement or cancellation is made, notice of such call shall be mailed to each holder of shares of stock called at his address as it appears upon the books of the corporation. The corporation shall, not later than said day, deposit with a * * * [bank] to be designated in such notice, for the account of such holder, the amount of the purchase price of the shares so called * * *. After such notice and deposit all shares so called shall be deemed to have been transferred to the corporation, or retired or cancelled as the case may be, and the holder shall cease to have, in respect thereof, any claim to future dividends or other rights as stockholder, and shall be entitled only to the sums so deposited for his account. Any shares so acquired by the corporation may be held and may be disposed of at such times, in such manner and for such consideration as the board of directors shall determine.'

Subsequent to the first adoption of these amendments in 1925 the plaintiff from time to time purchased additional shares of common stock and the certificates issued to him in each instance contained the provisions just quoted relating to the call of common stock. Each of the stubs from which the certificates were detached, thirty-four in all, contained the following: 'In consideration of the issue to me of the above-mentioned certificate, I promise to be bound by the articles of organization of the corporation printed on the back of said certificate (which I have read) so long as said provisions remain in force.' On each stubbelow this clause the plaintiff affixed his signature.

The common stock of the corporation is closely held and is owned only by members of its board of directors and board of executives, or their families, with the exception of some shares owned by two charitable trusts, the Charles H. Hood Educational and Charitable Trust, and the Charles H. Hood Fund. The holders of the common stock are entitled to vote and just prior to the commencement of suit there were outstanding 215, 939 shares of this stock.

The plaintiff was an employee of the corporation from 1913 to March 1, 1951, when, at his own request, he retired. From 1922 to the time of his retirement he was a member of the board of executives. In 1936 he became a director and remained such until May 7, 1952. From 1939 until he left the corporation's employ he was also its assistant treasurer.

On May 29, 1953, no arrangements having been made by the plaintiff to sell his common stock to the corporation, a letter was sent to him by the corporation informing him that the directors had voted to call 1,540 shares for purchase on June 30, 1953, in accordance with paragraph 7 of the agreement of association. (At that time the plaintiff owned 3,648 shares individually and held additional shares as trustee or agent.) He was also informed of the book value which the board had fixed for these shares and that the amount of the purchase price would be deposited with the Second National Bank of Boston on or before June 30, 1953. On June 25, 1953, the bank notified the plaintiff that this sum had been deposited with it and that it would be paid to the plaintiff on or after June 30th. ¹

The plaintiff is the only stockholder whose common stock has been called pursuant to these provisions. Since 1925 all executives and directors retiring from the service of the corporation have made arrangements to sell their shares of common stock to the corporation or to active executives or directors. 'The * * * corporation and the individual * * * [defendants] acted in good faith in calling the plaintiff's stock, and [did] not [act] in an abitrary manner nor for an improper purpose.'

The action of the corporation in calling the plaintiff's stock was grounded on the quoted provisions of its articles of organization--applicable to all common stock--and presents the broad question whether such provisions in the articles of organization of a Massachusetts business corporation are valid and enforceable. The question is one of first impression.

The main contentions of the plaintiff are summarized in his beief as follows: '[These] provisions which purport to give the directors power to call shares of the * * * corporation's common stock against the will of the holder at any time and for any or no reason exceed the limits of corporate power established by the governing statutes. They destroy the independence of stockholders in matters which the statutes commit to them; they place the stockholders as to all corporate matters at the mercy of directors; they violate the basic doctrine that all holders of the same class of shares be treated alike; indeed they are inherently discriminatory and by their nature invite abuse. They do, in fact, cut through all the basic attributes of common stock ownership.'

We agree with the plaintiff that decisions upholding restrictions on the transfer of shares, some of which are collected in the footnote, do not answer the problem here presented. ² It is one thing for the charter or by-laws of a corporation to provide that a stockholder cannot sell his stock unless he first offers it for sale to the corporation, and quite another to provide that he must sell his stock to the corporation whenever the board of directors so determines. While the provisions under consideration go very far we are not prepared to say that they are illegal or contrary to public policy.

These provisions do not fall within that classification of acts which are inherently forbidden to any corporation because of the nature of the structure and operation of a corporation. (See, for example, Whittenton Mills v. Upton, 10 Gray. 582, holding that a corporation cannot enter into a partnership.) Contracts whereby a corporation is given the right to call the stock owned by an employee on the termination of his employment, even if the employment can be terminated at the will of the corporation, are not uncommon and have generally been enforced. Arentsen v. Sherman Towel...