Security Finance Co., In re
| Decision Date | 12 November 1957 |
| Court | California Supreme Court |
| Parties | In re SECURITY FINANCE CO., a corporation in the process of voluntary winding- up. Earl R. ROUDA, Petitioner and Respondent, v. George N. CROCKER and Herbert A. Crocker, Respondents and Appellants. S. F. 19455. |
Brobeck, Phleger & Harrison, Long & Levit, Malcolm T. Dungan and Bert W. Levit, San Francisco, for appellants.
Young, Rabinowitz & Chouteau, Morris M Doyle, William W. Schwarzer, and McCutchen, Thomas, Matthew, Griffiths & Greene, San Francisco, for respondent.
This appeal is from orders of the Superior Court Granting a petition for judicial supervision and assuming jurisdiction under Corporations Code section 4607 over a corporation allegedly in the process of voluntary winding up and dissolution pursuant to Corporations Code section 4600.
The Security Finance Copmany, the enterprise now alleged to be in the process of winding up, began in 1940 as a partnership engaged in the business of making personal loans and buying conditional sales contracts. The partners were Earl R. Rouda, and Herbert A. and George N. Crocker, who are brothers. Rouda had considerable experience in the personal loan business, and agreed to devote his talents and energies to the enterprise. The Crokers agreed to contribute $20,000 in capital and to secure necessary bank credit.
In 1946 the partners decided to incorporate. They agreed that Rouda was to hold 3,000 shares and the Crockers 1,500 shares each of the common stock of the corporation. The Crockers and other shareholders. whose names do not appear in the record, hold 11,500 shares of preferred stock. The right to vote is vested exclusively with the common stock in the absence of default in the payment of dividends to the preferred shares.
The incorporation agreement reaffirmed the principles on which the partnership was founded: Rouda agreed to 'devote his entire and undivided time, attention, effort, business experience, and knowledge to the interests and conduct of the business * * *,' and to contribute his 'work and labors specifically to the active management and operation of the business. * * *' The Crockers agreed to procure loans from banks, and in their sole discretion to make available to the corporation their credit and financial standing. The agreement required unanimity for all acts of the board of directors and for the exercise of powers vested in the voting shareholders, and provided generally that, 'it is the intention of the parties hereto that the control of the corporation and of all its acts shall be exercised by and with the unanimous concurrence of all of the parties hereto.' The agreement also provided that no shareholder could sell all his common stock unless the purchaser first agreed that it would become nonvoting stock, or agreed to the unanimous consent provisions in the incorporation agreement and the other shareholders were willing to have the transferee substituted for his transferor as a voting shareholder.
Rouda is the president and general manager of the corporation and chairman of the board of directors. He has exclusive control of the day to day business of the corporation. Under Rouda's management the corporation has grown and prospered, and during the months immediately preceding the present litigation profits reached the highest level in the corporation's history.
The parties had their first serious disagreement toward the end of 1952. The Crockers filed an action for dissolution of the corporation contending that Rouda had failed to devote his full time and energies to the business and had diverted to his own use the funds and property of the corporation and the services of its employees. Rouda then filed an action for declaratory relief contending that the Crockers had breached the incorporation agreement by failing to lend their credit to the corporation and by commencing the dissolution proceedings. These differences were compromised in March, 1954. In the settlement agreement Rouda agreed to pay $15,500 to the Crockers and $45,000 to the corporation, secured by a pledge of his stock. The parties thereupon released each other from all claims arising out of the subjects in dispute.
Notwithstanding the settlement of the parties' disputes and the return of business to a high level of prosperity, Rouda, in December, 1954, expressed his wish to withdraw from the corporation. Without the consent of the Crockers, he negotiated for a sale of the business and received six offers from interested parties. The Crockers stated that they were completely satisfied with the prosperous condition of the business and did not wish to sell. They would consent to a sale of the business only if Rouda paid them $100,000 to release him from what they said was his contractual obligation to serve the corporation indefinitely. According to Rouda's testimony, he then suggested that the Crockers buy his stock for $275,000 or an amount reached through negotiation, or if they did not buy within a certain time, that he would buy their stock for the same price. The Crockers were unwilling to buy Rouda's stock or to sell him theirs. This dispute culminated in an ultimatum from Rouda that if the Crockers did not agree to his proposal for a sale of stock or of the business, he would dissolve the corporation.
As security for his promise to make payments under the settlement agreement of 1954, Rouda pledged all his stock to the Anglo-California Bank. In June, 1955, he redeemed the stock with money borrowed from the First Western Bank, and then immediately pledged the stock to First Western. He promised First Western that he would repay them with proceeds from the sale of the business, or, if the business was not sold, that he would dissolve the corporation and pay them from his distributive share. In the settlement agreement of 1954, Rouda promised to disclose his personal investments and business activities to the Crockers, but the Crockers did not learn of the second pledge until after this action was commenced.
In July, 1955, Rouda, as holder of fifty per cent of the voting stock of Security Finance, executed and filed with the corporation his consent to voluntary dissolution. He then executed for the corporation and filed with the Secretary of State a certificate of election to wind up and dissolve. In August, 1955, he petitioned the superior court for judicial supervision of the winding up and dissolution. The petition states that the corporation is in the process of voluntary winding up and dissolution, and that judicial supervision is necessary because of serious differences of opinion between Rouda and the Crockers 'with respect to conduct of the business of Security Finance Company, as well as with respect to a proper policy relating to salaries, dividends, financing, and sales of assets, as a result of which unanimous consent cannot be had.' After a hearing on an order to show cause why the petition should not be granted, the court granted Rouda's petition and issued an order in which it assumed jurisdiction over the winding up of the corporation, directed that notice be given to shareholders and creditors, and appointed a referee to hear and determine any matters that might arise during the winding up. The Crockers appeal.
At common law a corporation had no power to end its existence. The shareholders could surrender the charter, but actual dissolution depended on acceptance by the sovereign. Whether or not surrender of the charter of a prosperous corporation could be effected by a majority of the shareholders was long a subject of dispute. See Bowditch v. Jackson Co., 76 N.H. 351, 82 A. 1014, 1016-1018, L.R.A 1917A, 1174, appeal dismissed 239 U.S. 627, 36 S.Ct 164, 60 L.Ed. 474; Warren, Voluntary Transfers of Corporate Undertakings, 30 Harv.L.Rev. 335-346; but see People v. Ballard, 134 N.Y. 269, 32 N.E. 54, 59; Forrester v. Boston Consol. Copper & Silver Mining Co., 21 Mont. 544, 55 P. 229, 233. The fact that powers necessary for the attainment of corporate objectives were ordinarily vested in the majority did not necessarily mean that the minority should have no say on the fundamental issue of corporate life or death. In California, as in many other states, general statutory provisions authorize voluntary dissolution with the consent of a certain percentage of the shareholders.
Section 4600 of the Corporations Code provides that, 'Any corporation may elect to wind up its affairs and voluntarily dissolve by the vote or written consent of shareholders or members representing 50 precent or more of the voting power.' Section 4607 provides that, 'If a corporation is in the process of voluntary winding up, the superior court * * * upon the petition of * * * (b) the holders of 5 percent or more of the number of its outstanding shares * * * may make orders and adjudge as to any and all matters concerning the winding up of the affairs of the corporation.' Sections 4608 to 4619 provide that the jurisdiction of the court includes the determination of claims against the corporation and the rights of the shareholders in the assets, the settlement of directors' accounts, the appointment of referees, and other matters necessary for the equitable settlement of corporate affairs.
The court has jurisdiction by virtue of section 4607 only if the corporation is 'in the process of voluntary winding up,' and the corporation is in the process of voluntary winding up only if a valid election to wind up has been made pursuant to section 4600. In the present case, therefore, in assuming jurisdiction over the corporation the court necessarily determined that Rouda had validly consented and exercised the corporate election, and that the corporation was in the process of voluntary winding up and dissolution.
Shareholders representing fifty per cent of the voting power do not have an absolute right under section 4600 to...
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