N. C. Roberts Co. v. Topaz Transformer Products, Inc.

• Decision Date: 01 February 1966
• Citation: 49 Cal.Rptr. 209,239 Cal.App.2d 801
• Court: California Court of Appeals Court of Appeals
• Parties: , Blue Sky L. Rep. P 70,705 N. C. ROBERTS COMPANY, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. Legler BENBOUGH, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. David Monroe SELLGREN, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. Edward UHL, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. Otto A. GERTH, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. Armistead B. CARTER, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. John E. LUCAS, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. I. Norman LAWSON, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents. Civ. 7635-7642.

Page 209

49 Cal.Rptr. 209

239 Cal.App.2d 801, Blue Sky L. Rep. P 70,705

N. C. ROBERTS COMPANY, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

Legler BENBOUGH, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

David Monroe SELLGREN, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

Edward UHL, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

Otto A. GERTH, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

Armistead B. CARTER, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

John E. LUCAS, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

I. Norman LAWSON, Plaintiff and Appellant, v. TOPAZ TRANSFORMER PRODUCTS, INC., a corporation, et al., Defendants and Respondents.

Civ. 7635-7642.

District Court of Appeal, Fourth District, Division 1, California.

Feb. 1, 1966.

Augustine & Bryans and Don Augustine, San Diego, for plaintiffs and appellants.

Procopio, Price & Cory and John H. Barrett, San Diego, for defendants and respondents.

WHELAN, Justice.

Eight different plaintiffs (appellants) have taken appeals in their separate actions from a single judgment.

The defendants in the eight actions were Topaz Transformer Products Inc., a corporation (Topaz) and Robert L. McLoughlin and William D. Campbell, identified hereafter. The eight actions were consolidated for trial with an action for declaratory relief (#273044) in which Topaz, McLoughlin, Campbell and others were plaintiffs and the eight appellants were defendants.

As was proper, a single set of findings was made and a single judgment entered covering all nine actions. (Stanton v. Superior Court, 202 Cal. 478, 261 P. 1001; Bechtold v. Bishop & Co., Inc., 16 Cal.2d 285, 105 P.2d 984.) No appeal was filed in action #273044.

Each appellant was the owner of preferred and common stock of Topaz, of which in all they owned 5,950 preferred shares and 2,975 common shares. (Common shares represented by certificates outstanding at the time of commencement of the action will be referred to as 'reissued new common' when necessary to distinguish them from shares represented by certificates issued earlier, which will be called 'new common.') Each appellant sought to recover his investment in the preferred shares only, upon the ground that the preferred shares were void and worthless as having been issued in violation of the conditions of the permit under which they were issued. Each sought, however, to retain his shares of reissued new common stock. Their actions were filed on January 8, 1963.

Action #273044, filed on March 20, 1963, sought a determination of the validity of the preferred and common stock, both of which the complaint alleged were valid. All owners, other than appellants, of preferred and common shares joined Topaz as plaintiffs. Seven had obtained their shares under the same conditions as appellants. The number of preferred shares owned by them was 4,050; of reissued new common, in excess of 35,000.

Topaz was incorporated under California law in 1957. Its authorized capital was $25,000, consisting of 25,000 shares of common stock with a par value of $1 each (old common).

On September 19, 1957, the Commissioner of Corporations authorized the sale and issuance of 30 shares of old common, of which in February of 1960 McLoughlin and Campbell held 15 shares each.

Prior to February 16, 1960, Topaz authorized an amendment to its articles of incorporation to create a class of preferred stock with a $10 par value per share, and to replace the original provision for common shares with one creating 50,000 shares of common without par value (new common), and permit the conversion of 10,000 shares of preferred for 10,000 shares of new common.

On that date, application was made to the Commissioner of Corporations for a permit to issue 40,000 of the proposed new common in exchange for the outstanding 30 shares of old common at the rate of 1,333 1/3 shares of new for one share of old; to sell each of 10,000 shares of preferred for $10 cash net.

On March 4, 1960, a permit was issued authorizing the sale and issuance of the securities as requested, subject to certain conditions, which were: The by-laws were to be amended in the manner authorized (which was done on March 17, 1960); 40,000 shares of new common were to be issued to the holders of the old, which was first to be surrendered to Topaz and cancelled; after the 40,000 shares of new common Following that part which authorized the sale and issue of shares as outlined (paragraphs 1, 2 and 3 of the permit), the permit stated:

had been issued, the 10,000 shares of preferred might be sold to the persons named in the application, which included all but one of the appellants.

'This permit is issued upon the following conditions:

'* * *

'(c) That none of the securities authorized by paragraphs 1, 2 and 3 hereof shall be sold or issued unless and until the applicant first shall have selected an escrow holder and said escrow holder shall have been first approved in writing by the Commissioner of Corporations; that when issued all documents evidencing any of said securities shall be forthwith deposited with said escrow holder, to be held as an escrow pending the further written order of the said Commissioner; that the receipt of said escrow holder for said documents shall be filed with said Commissioner; and that the owner or persons entitled to said securities shall not consummate a sale or transfer of said securities, or any interest therein, or receive any consideration therefor, until the written consent of said Commissioner shall have been obtained so to do.'

The named persons to whom preference shares might be sold included Norman C. Roberts Company (Roberts) and six other appellants whose names had been furnished by Roberts as the result of a proposal made by David Sellgren on behalf of Roberts for the financing needed by Topaz. An amended permit issued May 17, 1960 added other names.

Roberts was an underwriter and dealer in securities and a member of the New York Stock Exchange.

On March 18, Topaz and Roberts signed an agreement under which Roberts was to receive $5,000 for advising Topaz as to income and marketing of securities for five years; by a second agreement, McLoughlin and Campbell gave Roberts the right to buy 10 per cent of their common stock should they make a public offering of it; in a third contract, executed at the same time, stated to be for the benefit of all those who might become holders of preferred shares, McLoughlin and Campbell agreed to give Roberts proxies on sufficient shares to elect a member of the board of directors. The $5,000 fee was paid to Roberts in two instalments on April 27 and August 16, 1960.

On March 24, 1960, Roberts informed McLoughlin and Campbell that Roberts and its clients would not purchase the issue of preference shares and that McLoughlin and Campbell had three alternatives: (1) To sue Roberts; (2) get financing elsewhere; or (3) give the prospective investors a greater share of the corporation.

McLoughlin and Campbell concluded that they had no possible choice but to make 5,000 of their new common shares available to the prospective purchasers of preferred shares on the basis of one 'bonus' common share for each two preferred shares purchased. This was accomplished by an agreement to transfer the 5,000 shares to Roberts' attorney for two cents on March 28, 1960.

The minutes of a meeting of the board of Topaz on March 28, 1960 spoke of the personal holdings of all the presently outstanding common stock of the corporation (being 40,000 shares) of McLoughlin and Campbell.

Shares of preferred and new common were issued on various dates from March 31 though August 1, 1960, when the sale of all the preferred shares was completed to Roberts and its clients, each of whom received new common in the ratio of one to two of preferred.

The funds from the sale of the preferred shares were transmitted to the escrow holder, the preferred shares issued, the certificates therefor retained in escrow, and a deposit receipt issued. However, the documents (stock certificates) evidencing the In each instance, the certificate for the new common shares and a receipt showing the holding in escrow of the preferred shares were transmitted by the escrow agent to the attorney who was then acting for Roberts.

'bonus shares' were not held in escrow but were delivered to the preferred purchasers.

Certificates for new common were issued also to McLoughlin and Campbell, and to other persons in addition to the clients of Roberts. No consideration was paid to the corporation for the transfers to persons other than McLoughlin and Campbell.

In July of 1961, when the Commissioner of Corporations brought the fact to their attention, the officers of Topaz and its attorney, who was the approved escrow agent, first became aware that the new common stock certificates should not have left the hands of the escrow holder.

Topaz then asked the Commissioner for a suggested solution. The plan adopted involved recalling all the new common shares.

On September 22, 1961, a letter requesting return of the certificates for new common was sent to all holders thereof by the escrow agent. It gave information that the permit to issue the stock contained an escrow provision; that only the preferred stock had been issued in escrow; and that application would be made to the Commissioner to reissue the common shares in escrow.

All holders of certificates for new common stock returned them to the escrow agent ¹ before the end of December of 1961.

On January 22,...