Whicher v. Delaware Mines Corporation, 5805

• Decision Date: 09 September 1932
• Docket Number: 5805
• Citation: 15 P.2d 610,52 Idaho 304
• Parties: L. E. WHICHER, WILLIAM W. COHN and WM. SULZER et al., Appellants, v. DELAWARE MINES CORPORATION, a Corporation, and MATT BAUMGARTNER et al., Directors and Officers Thereof, and ASSOCIATED MINES CORPORATION, LIMITED, a Corporation, and MATT BAUMGARTNER et al., Respondents
• Court: Idaho Supreme Court

15 P.2d 610

52 Idaho 304

L. E. WHICHER, WILLIAM W. COHN and WM. SULZER et al., Appellants, v. DELAWARE MINES CORPORATION, a Corporation, and MATT BAUMGARTNER et al., Directors and Officers Thereof, and ASSOCIATED MINES CORPORATION, LIMITED, a Corporation, and MATT BAUMGARTNER et al., Respondents

No. 5805

Supreme Court of Idaho

September 9, 1932

CORPORATIONS-REORGANIZATION-RIGHTS OF STOCKHOLDERS-ASSESSMENTS.

1. Organization of new corporation by directors of old corporation and transfer of old corporation's assets without consideration other than issuance of stock to new corporation, constituted reorganization of old corporation.

2. In absence of statutory authority, voluntary reorganization of corporation can be accomplished only on consent of all stockholders.

3. Stockholder has vested interest in corporate property, of which he cannot be deprived, in absence of delinquency justifying forfeiture.

4. Stockholders not consenting to proposed reorganization cannot be compelled to participate in continuation of corporate business under new corporate franchise.

5. Corporation issuing stock as nonassessable cannot levy assessment thereon.

6. That creditors might effect judicial sale of corporate property held not to affect right of holder of nonassessable stock to object to attempted assessment.

7. Nonassenting stockholder cannot be deprived of nonassessable stock.

8. Transfer of corporate property corporation's reorganized entity held not "sale" within terms of charter or statutory enactment permitting directors to sell corporate assets and accept stock of another corporation in payment (Laws 1929, chap. 262, sec. 32).

9. Where there is no substantial conflict and evidence is largely documentary, supreme court will examine it anew to determine whether it is sufficient to sustain finding.

10. That stockholder objecting to reorganization plan of majority submitted plan of his own held not to estop him from objecting to reorganization as made.

11. Transaction whereby directors and majority stockholders, over objections of minority, reorganized corporation changing nonassessable stock to assessable, thus forcing stockholders to pay corporation's debts, greater part of which were owing to directors, constituted constructive fraud (Laws 1929, chap. 262, sec. 29).

12. When action advantageous to corporate director is taken at meeting in which he participates and where his presence is necessary to constitute quorum, that action is voidable at instance of corporation, or, if it refuses to act, at instance of nonconsenting stockholder.

APPEAL from the District Court of the First Judicial District, for Shoshone County. Hon. Albert H. Featherstone, Judge.

Action in equity to set aside a transfer of corporate assets, to restrain the sale of corporate stock, for a receivership and an accounting. Judgment for defendants. Reversed.

Reversed and remanded, with instructions. Costs awarded to appellants.

Therrett Towles, for Appellants.

The provisions in the charter and on the stock certificates of Delaware company making its stock nonassessable constituted a valid and binding contract between the corporation and its stockholders, which the stockholders could rely upon and enforce. (Wall v. Basin Min. Co., 16 Idaho 313, 101 P. 733, 22 L. R. A., N. S., 1013; Upton v. Burnham, F Cas. No. 16,799; Scovill v. Thayer, 105 U.S 143, 26 L.Ed. 968; Jones v. Frost, 32 Idaho 214, 179 P. 949; Reinertsen v. Idaho Power etc. Co., Ltd., 32 Idaho 353, 182 P. 851; Garey v. St. Joe Min. Co., 32 Utah 497, 91 P. 369, 12 L. R. A., N. S., 554.)

The organization of the Associated company having assessable stock by a majority of the officers and directors of the Delaware company, and the transfer to it of all the assets of the Delaware company, subject to the debts and liabilities of said company, which the Associated company expressly assumed, and the issuance and distribution of Associated stock among the assenting stockholders of Delaware company, was in fact and law only a reorganization of Delaware company, so that the new company was bound by the existing obligations and contracts of that company. (5 Thompson on Corporations, 2d ed., secs. 6008, 6014; Fletcher, Cyc. Corporations, vols. 7, 10, sec. 4984; vols. 7, 10 and 11, sec. 4986; Seymour v. Boise R. R. Co., 24 Idaho 7, 132 P. 427; Stanford Hotel Co. v. M. Schwind Co., 180 Cal. 348, 181 P. 780.)

The action of majority stockholders of Delaware company, who had organized a new company to which all assets of the old company had been transferred, to compel dissenting stockholders to take assessable stock in such new company in lieu of their nonassessable stock in the old company, and to pay assessments thereon, in addition to a two dollar per thousand share stock transfer tax, and to make a sale of their stock resulting in a forfeiture of all their rights and equities in and to the assets of the corporation, where such dissenting stockholders refused to yield to such compulsion, was illegal and void, for the reason that it was an invasion of vested rights, an impairment of the obligation of contracts and a confiscation of property without due process of law, within the protection of the federal and state Constitutions. (14 Corpus Juris, "Corporations," sec. 707, p. 480; Kent v. Quicksilver Min. Co., 78 N.Y. 159; Garey v. St. Joe Min. Co., supra; 12 Corpus Juris, "Constitutional Law," sec. 537, p. 969; Gresham v. Island City Sav. Bank, 2 Tex. Civ. App. 52, 21 S.W. 556; Bank of China, Japan & The Straits v. Morse, 168 N.Y. 458, 85 Am. St. 676, 61 N.E. 774, 56 L. R. A. 139.)

John M. Gleeson and Frank Griffin, for Respondents.

Appellant having made his own proposition for reorganization and having urged its acceptance at the special stockholder's meeting of the Delaware company of October 27, 1930, requesting from the Delaware Company at said time a resolution adopting it. Appellant's plan consisted of the organization of a new company; the exchange of its stock with the Delaware stockholders; the new company to take over all the property of the Delaware; the new company's stock to be the same as assessable and the exchange of stock direct. When this was voted down a resolution containing the same legal principles in substance was adopted. This was a consent by appellant to respondent's organization and he cannot now be heard to complain. (Ireland v. Palestine etc. Co., 19 Ohio St. 369; 10 Cyc. 527; Jonas v. Frost, 32 Idaho 214, 179 P. 949.)

LEEPER, J. Lee, C. J., and Budge, Givens and Varian, JJ., concur.

OPINION

LEEPER, J.

This action is primarily concerned with the validity of the reorganization of a corporation, whereby it was attempted to convert nonassessable shares of its capital stock into assessable shares. The facts out of which the action arose are as follows: The Delaware Mines Corporation is an Idaho Corporation, organized in 1926, and continuously thereafter existing, in which the plaintiffs are stockholders, their stock being nonassessable by express provision of the articles of incorporation, and each certificate bearing upon its face the words, "Fully paid and nonassessable." The appellant Whicher is the owner of 232,100 shares of the stock, the consideration received on account of the transfer of the Rex group of mining claims to the company, and the other plaintiffs are the owners of lesser amounts of the stock, all constituting a minority. The respondents Baumgartner, Bailey, Mrs. Bailey, Hooper and Cox are the directors of the company, Baumgartner being president and Bailey vice-president and manager. Baumgartner and Mr. and Mrs. Bailey own more than 900,000 shares of the company and have exercised substantial control ever since its organization.

The company is the owner of certain patented and unpatented mining claims and a considerable amount of mining machinery and other property. It had been financed entirely through sales of stock, the selling program having been handled by Baumgartner upon a commission basis. By the year 1930 it was no longer possible to sell stock in amounts adequate to continue the financing of the company by that method, and the company had no cash wherewith to continue operations. By September of that year its alleged indebtedness amounted to $ 17,268, of which Baumgartner claimed $ 9,040.51 was due him for commissions on sales of stock, and of which Bailey claimed $ 4,133.50 was due him for past services as manager. The balance of the indebtedness was represented by loans and open accounts.

It appears that there had been considerable correspondence between appellant Whicher and Baumgartner and Bailey relative to this indebtedness, beginning in 1928. In August of 1930, Baumgartner, Bailey and Ferguson met as a board of directors and passed a resolution whereby Baumgartner was allowed to take a compressor and motor belonging to the company at an agreed price of $ 1,800, to be credited on his account. On September 29, 1930, Baumgartner called a special stockholder's meeting, mailing a notice thereof to each stockholder and asking for proxies. In this notice he advised the stockholders that steps must be taken to pay the debts and suggested a reorganization on an assessable basis, but he did not advise as to the amount of the indebtedness or to whom it was owing.

Pursuant to this notice, the stockholders' meeting was held on October 27, 1930. At this meeting only Baumgartner, Bailey and wife and two persons named Lindquist were present, and the records are in such shape that it is difficult to determine therefrom whether or not a majority of the stock was present and legally voted in favor of the resolution adopted thereat. The plaintiffs were not present, either in person or by proxy. The resolution provided in substance, (1) that the...