St. Regis Candies v. Hovas

• Decision Date: 29 February 1928
• Docket Number: (No. 1001-4880.)<SMALL><SUP>*</SUP></SMALL&gt
• Citation: 3 S.W.2d 429
• Parties: ST. REGIS CANDIES, Inc., et al. v. HOVAS et al.
• Court: Texas Supreme Court

3 S.W.2d 429

ST. REGIS CANDIES, Inc., et al. v. HOVAS et al.

(No. 1001-4880.)^*

Commission of Appeals of Texas, Section A.

February 29, 1928.

Certified questions from Court of Civil Appeals of First Supreme Judicial District.

Action by St. Regis Candies, Inc., and another, against S. N. Hovas, and others. From a judgment for defendants, plaintiffs appealed to the Court of Civil Appeals, which court certified questions to the Supreme Court. Questions answered.

Baker, Botts, Parker & Garwood, H. M. Garwood, Jas. L. Shepherd, Jr., S. H. German, Boyles, Brown & Scott, Edward S. Boyles, P. N. Fahey, and J. T. Scott, Jr., all of Houston, for appellants.

Fulbright, Crooker & Freeman, and Allen B. Hannay, all of Houston, for appellees.

NICKELS, J.

Xanthull owned a plant and business. He became associated with four other men for corporate purposes. They incorporated as St. Regis Candies, Inc. Xanthull's plant and business, at an agreed valuation, became the property of the corporation received in payment for 510 shares of "class A stock" and 40 shares of "class B stock" of the corporation. The other associates on their part subscribed for the remaining 490 shares of "class A stock" and 210 shares of "class B stock." Inferably, they paid the requisite proportion in cash and became liable for the remainder of their stock subscriptions. A charter was secured, in which the declaration is made that the "capital stock" is $125,000, divided into 1,250 shares of $100 each, and divided further "into two classes, 1,000 shares thereof being known as class A stock and 250 shares thereof being known as class B stock," it being declared also that:

"Class B stock * * * shall have no voting privileges or power * * * no right to participate proportionately in future increases of capital stock * * * and shall be subject to such conditions, restrictions and limitations as may be imposed by the by-laws."

A meeting attended by Xanthull and three of the other associates was held, at which the foregoing charter recitations were definitely approved and at which by-laws were adopted in which: (a) Class B stock was restricted as in the charter; (b) future meetings of class A "stockholders were provided for; (c) it was provided that each class A stockholder would have one vote for each share of that class of stock owned by him. It was also provided that the owners of class B stock would be entitled to participate in meetings, but without voting rights. The selection of directors was by by-law provisions left to class A stockholders as was the matter of by-law amendments. The fifth associate ratified that action.

"Under the agreements of the parties, Xanthull took charge of the business, managed and controlled its affairs, * * * undisturbed, until the 12th day of January, 1927" (a period of about a year). On that day the associates, save Xanthull, undertook to call a special meeting of the directors for a named date and issued notices therefor for the purpose of altering the by-laws so as to revoke the authority of the president (Xanthull) to manage the affairs of the corporation, and to provide for amendment of the charter and by-laws so as "to eliminate the class B stock and make all of the stock in the corporation have the same rights, powers, and preferences." The meeting was held, attended by all five of the associates, and over the protest of Xanthull the holders of class B stock voted as if it were class A stock. The result was that by affirmative vote of those holding 49 per cent. of class A stock and 210 shares of class B stock the changes proposed were ordered; Xanthull voted his 51 per cent. of class A stock in the negative. A charter amendment was filed in the name of the corporation.

January 18th, Xanthull, "for himself and in behalf of the St. Regis Candies, Inc.," brought suit against the other associates. The facts already stated were alleged, and it was shown, further, that January 19th was the day regularly fixed for annual meeting of stockholders, that the meeting would be held, and that the defendants would undertake to "vote class B stock and thereby control such meeting and elect directors of their own choosing and undertake to shape the policies of the corporation * * * and deprive him (Xanthull) of the control of the corporation as conferred upon him by his ownership of 51 per cent. of the class A stock and by the terms of the charter and by-laws," etc. It was prayed that defendants be restrained from voting the class B stock at the meeting or at any other meeting and that the charter and by-law amendments theretofore undertaken be declared void. Restraining order was issued. Defendants answered, alleging the agreements depriving class B stock of voting rights to be "contrary to the Constitution and statutes of this state and against public policy and therefore void." Upon hearing, the injunction prayed for was denied, and an appeal was taken by Xanthull and the corporation to the Court of Civil Appeals, First District, wherein the cause is now pending. That court has certified these questions:

"No. 1. Is the contract entered into between the appellant Xanthull and the appellees, which was carried into the charter of the corporation, by the terms of which class A stock only had the right to vote, a valid contract; that is, is it binding as against the holders of class B stock, so as to exclude such stock from being voted? In other words, is there any provision in either our Constitution or statutes which demands that stock such as class B in the present case shall have the right to vote regardless of a provision in the charter of the corporation to the contrary?

"No. 2. Is such contract void as against public policy?"

Opinion.

The provisions of the charter and by-laws are by the parties assumed sufficient to evidence a contract in respect to preclusion of voting power in the holders of class B stock, so-called. The assumption appears justified on the facts, and we join in its indulgence. See Overland Auto Co. v. Cleveland (Tex. Civ. App.) 250 S. W. 453; Howe Grain & Merc. Co. v. Jones, 21 Tex. Civ. App. 198, 51 S. W. 24; 14 C. J. 161, 162, 346, 347; 7 R. C. L. 97, 142, 143.

The parties have treated the rights belonging to class B holders as being rights of stockholders, and the agreement in respect thereto (rather, the papers evidencing those rights) as being "stock." Whether in truth such is the character of those rights, or certificates, is a question which may be pretermitted; for the purposes of this case, we treat the rights, or certificates, as being of "stock" character.

Increase or decrease of "authorized" stock (articles 1330, 1332, R. S. 1925) dissolution (article 1387, R. S. 1925), or other fundamental alteration of corporate purpose, structure, or assets, has not been attempted in violation of the agreement; hence, questions pertaining to voting rights touching such proposals, are not directly involved — if involved at all, indirectly so, and so far as that subject-matter may throw light upon what implications, if any, are to be drawn from expressed statutory declarations.

This much has been said to posture the questions now presented; what is to be said has no reference to future situations of any different phase.

In so far as specific constitutional declarations (article 12) are concerned, and in so far as relevant, they make up a command to the Legislature (not to the courts or to individuals) to provide by general laws: (a) For creation of corporations; (b) "for the adequate protection of the public"; and (c) "for the adequate protection * * * of the individual stockholders." Except as to named classes of corporations (other than the class to which St. Regis Candies, Inc. belongs), execution of the command has witness in chapters 1-8 (arts. 1302-1395), tit. 32, R. S. 1925.

(a) Creation per statute: Naming of purposes in chapter 1 is followed in chapter 2 (art. 1303) by the declaration that "private corporations" are to be formed "by the voluntary association of three or more persons." In articles 1304, 1305, 1307, and 1308 (with exceptions in 1310-1312) certain acts are prescribed for the corporators (and, in article 1313, for the secretary of state) in perfection of the corporate entity. For aught that is shown St. Regis Candies, Inc., was sufficiently born. The abnormality claimed (classification of "stock" in the charter), if it be an abnormality, did not prevent corporate life or make the life given subject to forfeiture at will of anybody save, possibly, the state. Staacke v. Routledge, 111 Tex. 489, 241 S. W. 994; Parks v. West, 102 Tex. 11, 18, 111 S. W. 726, and cases there cited.

(b) Protection of the public: The corporate field in general is marked out in chapter 1, and in chapter 2 (article 1304) the "voluntary associates" are required to select and publicly name that part of the field which shall encompass corporate activity. The main purpose here is to protect the "public", first, against too great a delegation and any usurpation of power (Northwestern Fertilizing Co. v. Hyde Park, 97 U. S. 659, 666, 24 L. Ed. 1036; Gulf, C. & S. F. R. Co. v. Morris, 67 Tex. 692. 4 S. W. 156; Northside Ry. Co. v. Worthington 88 Tex. 562, 30 S. W. 1055, 53 Am. St. Rep. 778; Bowman Lbr. Co. v. Pierson, 110 Tex. 543, 221 S. W. 930, 11 A. L. R. 547); and, secondly, by affording the means whereby right to a claimed power or rightful use of an admitted power may be tested.

There must be a fund on hand or available with which to begin business, and the amount of it (in so far as it consists of capital stock) must be stated in the charter (article 1304). The fund may be wholly in cash or partly in cash and partly in credits represented by unpaid subscriptions. (Articles 1308, 1335, 1338, 1339, 1341, 1343, 1344, 1345). The fund may have constituents in form of "labor done or property * * * received" at proper valuation (section 6, art. 12, Constitution; article 1308, R. S. 1925). Such is the...