Rank v. Lease Associates, Inc.

• Decision Date: 06 February 1970
• Docket Number: No. 54,54
• Citation: 45 Wis.2d 689,173 N.W.2d 713
• Parties: Wallace RANK, Respondent, v. LEASE ASSOCIATES, INC., a Wis. corporation, et al., Appellants.
• Court: Wisconsin Supreme Court

Page 713

173 N.W.2d 713

45 Wis.2d 689

Wallace RANK, Respondent, v. LEASE ASSOCIATES, INC., a Wis. corporation, et al., Appellants.

No. 54.

Supreme Court of Wisconsin.

Feb. 6, 1970.

Plaintiff commenced this action against the defendants by service of a summons and complaint on December 13, 1968. The complaint alleges, among other things, that each and all of the individual defendants holds himself out and acts as a director of the corporate defendant, Lease Associates, Inc., and that in May, 1965, the plaintiff entered into an oral agreement with the corporate defendant, Lease Associates, Inc., for the purchase of 100 shares of the corporation's common capital stock for the sum of $51,790, of which amount the plaintiff has paid to defendant corporation the sum of $30,000. Additionally, the complaint further alleges that although the plaintiff has made due demand and has at all times been ready, willing and able to make payment of the balance of the purchase price when the stock certificate evidencing the 100 shares has been delivered to the plaintiff, the defendant corporation has failed and refused to execute and deliver to the plaintiff that stock certificate. In addition, it is alleged that these shares of stock could not be purchased in the open market, and that if they are not issued and delivered to the plaintiff, he will suffer irreparable damage.

In his complaint plaintiff alleges a further cause of action in the nature of a derivative suit particularizing instances in which the individual defendants have allegedly failed and neglected to perform their duties as directors of the corporate defendants and have 'acted contrary to the interests of said defendant corporation and its shareholders and have acted capriciously for the interests of some of or all of the individual defendants instead of in and for the interests of the defendant corporation.'

The plaintiff concludes his complaint by alleging, (a) that since the defendants failed to act upon written demand of plaintiff to take action to recover corporate funds being dissipated, plaintiff has not made any further demand upon the corporate defendant or the individual defendants with respect to the dissipation of the assets of the corporation, since such further demand would have been useless and of no effect, and (b) that plaintiff has no adequate remedy at law.

In the prayer for relief, the plaintiff prayed that the corporate defendant and the individual defendants as its directors and officers, be ordered to issue and deliver to the plaintiff a stock certificate of the said corporate defendant representing 100 shares of the common capital stock of the corporation; that the individual defendants be required to account for all sums which may have been paid to them or any of them wrongfully, unlawfully, or unreasonably out of the assets of the corporate defendant; that all damages sustained by the corporation be determined and that the individual defendants be adjudged to pay said sum to the corporate defendant with interest thereon; and that the plaintiff be restored to the offices of secretary-treasurer and director of the corporation.

Separate demurrers to the complaint were made by each of the individual defendants on the grounds: (1) That the plaintiff lacks the legal capacity to sue in that he is not a stockholder of the corporate defendant, Lease Associates, Inc.; (2) that the plaintiff improperly united a cause of action for recovery against the corporate defendant on an alleged contract with a derivative suit to recover property allegedly belonging to the corporation from its directors; and (3) the complaint did not state facts sufficient to constitute a cause of action as to each demurring defendant.

The trial court overruled the demurrers on all grounds. Each defendant appeals from the whole of the order overruling the demurrer, except the defendant corporation who concedes that the complaint states a good cause of action against it on the contract action, but appeals from the order overruling its demurrer on the other two grounds stated above.

Cahil & Fox, Milwaukee, Daniel O. Ryan, Jr., Milwaukee, of counsel for appellants.

Ralph J. Podell, Milwaukee, for respondent.

WILKIE, Justice.

It is conceded that the complaint is not demurrable insofar as a cause of action is stated with respect to the alleged contract for the purchase of stock. One further issue is dispositive of this appeal, namely: Has the plaintiff sufficiently alleged his status as a stockholder of the defendant corporation so as to entitle him to bring a derivative action on the corporation's behalf?

The plaintiff strenuously urges, and the trial court so found, that he sufficiently alleged his status as a stockholder in the defendant corporation so as to entitle him to bring the derivative action on its behalf. The plaintiff argues that in his complaint he has alleged that he is a stockholder in the corporation and that the defendant by demurring to the complaint has admitted this allegation as true.

This court has said:

'By demurring to the complaint the defendant admitted all of the facts well pleaded therein but it did not admit conclusions of law nor did it admit erroneous conclusions drawn from such facts by the pleader even though the conclusions bear the semblance of statements of facts. " ¹

This allegation that the corporate defendant at one time in an insurance application stated that plaintiff was secretary-treasurer and a stockholder is an allegation of a material fact and as such is admitted by demurrer. ²

In addition to this factor as an indication that the plaintiff is a stockholder, there are many cases dealing with the rights and status of stock subscribers. From these cases it could be reasoned by analogy that the plaintiff is a stockholder in the defendant corporation. ³ In other words, the plaintiff's position could be likened to a subscriber for unsold capital stock of a corporation, who by virtue of his contract of purchase, becomes a stockholder and as such entitled to enforce the ordinary rights of stockholders against the corporation. ⁴

Generally, one alleging status as a stockholder such as in the instant case has alleged sufficient status to bring a derivative action. ⁵ However, since the Corporation Law was codified in 1953 and Wisconsin statutes, by sec. 180.405, require that the plaintiff be a registered shareholder of the corporation at the time of the transaction complained of. ⁶

Under the plain terms of the statute, the plaintiff in a derivative action must be a registered holder of stock. Another state has a statutory requirement that a stockholder bringing a derivative action must be a registered stockholder at the time the transaction complained of took place. ⁷

Plaintiff argues that the Wisconsin statute should be construed to ignore completely the word 'registered.' He cites the revision committee note to this section indicating that the legislative purpose of this restrictive language was not to bar good-faith derivative actions but rather to prevent the corporation from being deluged by 'strike suits.' We submit that one of the prerequisites that the legislature had in mind in reaching its objective of insuring good-faith derivative actions was by the express requirement that the stockholder be registered.

We have held that in determining legislative intent this court may so construe the statute in question to determine the real intent even though this intent be contrary to he express language of the statute. ⁸

Here, the plain and unambiguous language means exactly what it says, i.e., that the plaintiff stockholder, in order to bring a derivative action, must allege that he was a registered stockholder at the time the alleged transaction took place.

Moreover, allowing only registered owners to sue enables a corporation to determine at any time during the proceeding whether a suing shareholder has the requisite financial interest to avoid bond requirements. ⁹ If during the action the shareholder's ownership falls below the required minimum, the corporation can demand security. ¹⁰ Thus, it can be seen that this statute does serve a bona fide purpose and is not absurd in its results. ¹¹

Under the liberal construction required to be given the complaint when challenged by demurrer, this court has little difficulty in finding that the plaintiff has sufficiently alleged his status as a stockholder in the defendant corporation. He must nevertheless allege his status as a registered stockholder. This he has failed to do and therefore the demurrer should have been sustained on this ground.

It should be noted that many courts, when not governed by this restrictive legislative provision, have held equitable ownership sufficient to establish the status of shareholder and thus entitle the...