Scully v. Automobile Finance Co.

• Decision Date: 20 February 1920
• Citation: 109 A. 49,12 Del.Ch. 174
• Parties: CHARLES Y. SCULLY, JOHN E. O'BRIEN, HARRY J. HOGG and HARRY T. ROSENHEIM. v. AUTOMOBILE FINANCE COMPANY and CENTRAL SECURITY COMPANY, AND OTHERS
• Court: Court of Chancery of Delaware

109 A. 49

12 Del.Ch. 174

CHARLES Y. SCULLY, JOHN E. O'BRIEN, HARRY J. HOGG and HARRY T. ROSENHEIM. v. AUTOMOBILE FINANCE COMPANY and CENTRAL SECURITY COMPANY, AND OTHERS

Court of Chancery of Delaware, New Castle

February 20, 1920

BILL FOR CANCELLATION OF CORPORATE STOCK. The complainants are stockholders of the Automobile Finance Company and filed the bill of complaint in this cause for the purpose of having cancelled all of the common stock of the said company. By amendment to the bill all of the common stockholders of Automobile Finance Company were made defendants. The facts in addition to those appearing in the opinion reported 11 Del.Ch. 355, 101 A. 908, are sufficiently stated in the following opinion of the Chancellor.

Herbert H. Ward, and Albert F. Bauerle, of Philadelphia, Pa., for complainants.

Robert H. Richards and James I. Boyce, and George J. Edwards Jr., of Philadelphia, Pa., for all defendants who have appeared in the cause.

OPINION

THE CHANCELLOR

This suit was brought by four stockholders of the Automobile Finance Company to have cancelled all the shares of common stock of the company, on the ground that they had been issued without consideration and illegally. A demurrer to the original bill was overruled, answers were filed thereafter and later an amended bill was filed and answers thereto filed. Testimony was taken, and a final hearing has been had. In the opinion filed at the time of overruling the demurrer the facts were not adequately stated, and as new facts appeared later, the important facts will now be here stated in such detail as seems necessary.

Two of the defendants, Walter H. McEvilla and Charles F. Chisholm, planned to establish through a corporation a business, the plan of which was that the corporation should advance part of the purchase money of an automobile, take title to it and turn it over to the purchaser under a form of lease, or bailment, until the company should be reimbursed payments made by it for the purchaser. To carry out the plan a Delaware charter was obtained for a corporation called the Automobile Finance Company, with an authorized capital stock of forty thousand shares, each of par value of ten dollars, of which twenty thousand shares ($ 200,000) were common stock and twenty thousand shares ($ 200,000) were preferred stock. The voting power was in the common stock only. An organization was effected by the three dummy directors, who together subscribed to one hundred shares of common stock. To carry out the plan another corporation was incorporated a day earlier, called the Central Security Company, with a capital stock of one hundred shares, each of the par value of fifty dollars, and all common stock. The same persons were the incorporators of the latter company and of the Automobile Finance Company, and they together subscribed for twenty shares. These two companies were organized practically together for a combined purpose above indicated, and the expenses of the incorporation and organization were advanced by the promoters of the plan.

The scheme above outlined was carried out. On December 11, 1916 there was the formal organization of the Central Security Company, and on December 15, 1916, the incorporators of Automobile Finance Company organized. At the first meeting of directors of the Automobile Finance Company, when the only subscribers to its capital stock and directors were the incorporators, McEvilla and Chisholm made a proposition "to turn over and assign to your corporation our plan for a general automobile purchasing and selling agency whereby prospective buyers may purchase new automobiles of any make on the installment plan, and to devote ourselves to effectuating the business of the corporation, in exchange for twenty thousand (20,000) shares of the common stock of your corporation full paid and non-assessable par value ten dollars ($ 10.00) per share." It was directed by them that the shares be issued, 19,988 to Central Security Company, and three each to Walter H. McEvilla, Henry Steubner, C. F. Chisholm and I. C. Shalkop, the four promoters, and the offer included the shares subscribed for by the incorporators. This offer was accepted by the dummy directors by a resolution worded like the offer. It was also resolved, as follows:

"That the board of directors do hereby adjudge and declare that said services and effort on behalf of the corporation is of the actual value of two hundred thousand ($ 200,000) dollars to this corporation, and that said plan of business and that such service in behalf of this corporation is necessary to insure the success of this corporation."

This contract was carried out by the delivery of the twenty thousand shares as directed, the incorporators transferring their shares to the Central Security Company, which company thereby acquired all but twelve shares of the common stock, the sole consideration for the issue of which was the business plan and future services of McEvilla and Chisholm.

The Central Security Company then made a contract to act as the exclusive agent for the sale of the preferred stock of the Automobile Finance Company at par for a commission, sold shares of preferred stock and gave to purchasers thereof shares of common stock expressly as a "bonus," or gratuity, and also gave other shares of common stock as an additional bonus to such purchasers as became directors of the Automobile Finance Company. All of the written subscriptions for the preferred stock contained such statements as to the "bonus" stock. Inasmuch as the Central Security Company was so acting as agent for the Automobile Finance Company, the shares of common stock which it distributed as a bonus were not to be classed as treasury stock, i. e., shares fully paid for and transferred to or made subject to the disposition of the corporation for distribution as a gratuity in connection with sales of its preferred stock.

The four complainants are holders of common and preferred stock of the Automobile Finance Company, and are directors thereof. In their bill, filed on August 7, 1917, it is claimed that the business plan was no matter or thing, service or property of any value so as to support the issuance of the common stock of the Automobile Finance Company, and that the whole scheme was a fraud. It was also alleged that as only the common stock had a right to vote, and all of it was illegally issued, there never had been a legal organization or officers of the company, or that at most they are de facto officers. A demand had been made by the complainants on the directors of the company to sue to cancel the shares of common stock, and there was a failure on their part to so act for the company.

The only defendants to the original bill were the two corporations. On May 23, 1918, an amended bill was filed making as defendants all of the holders of common stock, in addition to the two corporations. The new bill was practically like the original one. In addition it was there suggested, though not prayed for, that the effect of the illegal issue of common stock would be overcome by a re-organization of the company under the direction of the Court through a receiver, who, after getting in all of the common stock, would offer it for sale at par to the owners of preferred stock.

The two corporations, McEvilla, Chisholm, Shalkop, Steubner and several other stockholders appeared and answered the amended bill, and a decree pro confesso has been taken as to the others who did not appear or answer.

By the answers and the proofs taken some new features were developed. On August 1, 1918, the directors of the Automobile Finance Company adopted a preamble reciting that as this Court in overruling the demurrer had declared that there was no valid consideration for the common stock, the Central Security Company had returned to the Automobile Finance Company fifteen thousand, sixteen and one-half shares of stock, and it was resolved that the necessities of the business of the company required payment of five per cent. of the par value of the common stock issued and outstanding, and that amount was assessed on all outstanding stock. And further, that that call should supersede and be a substitute for any other call. In response to this call holders of about one-half of the common stock paid the five per cent. call.

The questions raised in the cause are as to the validity of the issue of common stock, and the consequences of declaring it to have been issued contrary to the constitution and statutes of the State.

By the constitution of Delaware no corporation shall issue stock except for money paid, labor done or personal property or real estate, or leases thereof, actually acquired by the corporation. Article 9, § 3. The statute provides that in the absence of actual fraud in the transaction the judgment of the directors as to the value of such labor, property, real estate or leases shall be conclusive. Revised Code of 1915, c. 65, § 14, par. 1928, p. 924.

All of the shares of the common stock of the Automobile Finance Company of par value of two hundred thousand dollars were issued pursuant to the agreement made by the company with McEvilla and Chisholm, whereby they were (1) to turn over and assign to the company a plan of doing business, and (2) devote themselves to effectuating that business. Part of the consideration, therefore, was property and the rest consisted of services to be rendered. Did either constitute a valid consideration within the meaning of the constitution and statutes of Delaware? The plan of business was an application to automobiles of plans by which prospective purchasers of property are assisted to buy and pay for the same and acquire title thereto, the company making the purchase and holding title until the...