
    Common Pleas Court of Montgomery County.
    W. D. Williams v. The National Pumps Corporation.
    Decided May 10, 1932.
    
      Craighead, Cow den, Smith and Schnacke, for plaintiff. Matthews & Matthews, and Goebel, Dock, & Goebel, for defendant.
   Snediker, J.

This case is submitted to us on an agreed statement of facts designated a stipulation. The plaintiff asks for a mandatory injunction directing the defendant to specifically comply with the provisions of certain shares „ of convertible stock owned by him in the defendant company and requiring the defendant to pay him dividends to which he claims to be entitled in accordance with the articles of incorporation and the terms and provisions of the stock which he owns. He also asks that a restraining order be issued against the defendant from paying any dividends to any of the common stockholders until adequate provision has been made and actual payment made to him of 'the dividends to which he claims to be entitled as hertofore stated. And he further asks that he be restored to all the things lost 'by reason of the acts of the defendant complained of in the petition.

The defendant corporation is organized and doing business under the laws of the state of Ohio. The plaintiff is the owner and holder of a stock certificate for ten shares of the capital stock of the defendant corporation, which stock is styled convertible stock without par value. When this stock was issued to the plaintiff as its owner he was entitled to certain preferences in the payment of dividends and in the event of the dissolútion of the corporation. These preferences are stated in the stock certificate as follows:

“No dividend shall be declared in any calendar year to the stockholders of managers shares until there have been declared to holders of convertible stock for said calendar year a dividend or dividends aggregating three dollars per share. Thereafter for said year the managers shares shall be entitled to receive dividends per share equal to the excess over three dollars per share per year declared to the holders of convertible stock, provided, however, that after the convertible stock shall have received five dollars per share in any calendar year no further dividends shall be paid to the holders of the convertible stock for said year; but the foregoing shall not limit the amount which may be paid to the holders of managers shares. When and if the dividend or dividends declared and paid to the holders of managers shares in any calendar year shall exceed an aggregate of five dollars per share then the holders of the convertible stock shall have the optional right at any time thereafter to convert said convertible shares into managers shares.”

“All stock shall have an equal voting power, share for share.”

“In case of involuntary dissolution the convertible stock is to receive $45.00 per share; In case of voluntary dissolution the sum of $75.00 per share, before anything is paid to the holders of managers share, who shall be entitled to receive all excess over said respective amounts, to the exclusion of the holders of convertible stock.”

The articles of incorporation of the defendant company were amended on August 15, 1927, and in that amendment, in the fourth article, there was included the preferences which we have quoted as being found in the plaintiff’s shares of stock, as well as certain provisions with reference to the maximum number of shares of the respective stock issued by the company. In April of 1928 the plaintiff became' a stockholder of the defendant. On April 28, 1930, at a meeting of the defendant’s board of directors resolutions were unanimously adopted which contained the following:

“Resolved that the board of directors does hereby fix Tuesday the 29th day of April, 1930, at the close of business, as the record date for the determination of the shareholders entitled to receive said notice and to vote at the meeting, and also as the record date, in the event that the proposed amendments to the articles are adopted, for the determination of the shareholders entitled to change the present share into the new shares as hereinbefore described, and to exercise all rights in respect to such change.”

On April 29, 1930, each of the stockholders had mailed to him a printed notice of a stockholders’ meeting to be held on May 9, 1930. This notice, which was directed to the shareholders, outlined amendments to the articles of incorporation which materially affected the stock of the plaintiff so far as his preferences and priorities are concerned. On May 9, 1930, that meeting was held at the .offices of the defendant company. Thirty nine thousand four hundred seventy six shares of convertible stock were present in person or by proxy, of the total issue of 45,000 shares, and 42,750 shares of managers stock out of a total issue of 45,000 shares. The stockholders voted on the amendments, and especially upon Article 4th, which was radically changed, with the effect stated. It was carried with ayes 81,876; nayes 350. There was then a vote by classes: convertible shares, ayes 31,126, nayes 350; managers shares, all present,- namely 42,750 ayes. The amendment was certified and mailed to the secretary of state on the 31st day of May, 1930. Plaintiff was not at the meeting, either in person or by proxy, and did not consent to and did not and does not approve of the action taken by the stockholders.

Thereafter, on the 31st day of May, 1930, the board of directors passed resolutions in pursuance to the amendments and made an order with respect to the exchange of certificates. This was mailed to the shareholders, and 88,784 shares of convertible and managers stock were- exchanged for certificates of common stock without par value. On July 9, 1930, the board of directors declared a dividend of 80.75 a share, payable on August 1, 1930, adopting a resolution with respect thereto which authorized and directed the proper officers of the corporation to issue dividend checks to all registered shareholders as of the close of business on July 21, 1930, The plaintiff, not having consented to the action taken by the stockholders and not having exchanged his stock for certificates of common stock without par value, did not receive the dividend so declared by the board, nor did he receive any dividend on his stock.. He has demanded dividends in accordance with the preference provisions found in his stock certificate and has been refused. He did not within 20 days from May 9, 1930, object in writing to the action taken at the shareholders’ meeting nor demand in writing payment of the fair cash value of his shares.

It is not contended by the plaintiff that there is any inherent illegality in the proceedings which resulted in the amendments to the articles of incorporation of the defendant company. His position, concisely stated, is that the defendant is bound by reason of its relation to him as a stockholder to still recognize the preferences and rights to which his stock is entitled by the provisions of his certificate, and that any other view would lead to an impairment of the obligations of his contract with the company.

It has never been definitely determined in this state that a stock certificate is a contract between the corporation and the holder, but we think there is no dou’bt that we may so say. There are many authorities to that effect. As stated by the Missouri Court of Appeals in the case of the Business Men’s Association v. Williams, 137 M. A. R. 583.

“The relation of stockholder and corporation arises from and exists in contract. So much is beyond question. 1 Thompson on Corporations, Section 1136; 1 Coke on Corporations (6 Ed.) Section 51.”

To the same effect are authorities quoted by counsel for the plaintiff in their brief.

Under favor of Article 13, Section 2 of the Constitution of Ohio the Legislature has from time to time altered and repealed the general laws under which corporations could be formed. Our recent corporation act was such legislation. But Article 13, Section 2 is always subordinate to the provisions of the Federal Constitution which prohibit a state from passing any law impairing the obligation of contracts, This prohibition applies not only to the ordinary statutes of a state but also to any clause in its constitution or any amendment thereto which produces the forbidden effect. As stated by the court in the case of Kenosha, Rockford, & Rock Island R. R. Co. v. Marsh, 17 Wis. 13-16:

“The occasion of reserving such a power either in the constitution or in charters themselves, is well understood. It grew out of the decisions of the Supreme Court of the United States, that charters were contracts within the meaning of the constitutional provision that the states should pass no laws impairing the obligation of contracts. This was supposed to deprive the states of that power of control over corporations which was deemed essential to the safety and protection of the public. Hence the practice, which has extensively prevailed since those decisions of reserving the power of amending or repealing charters. But this power was never reserved upon any idea that the legislature could alter a contract between a corporation and its stock subscribers, nor for the purpose of enabling it to make such alteration. It was solely to avoid the effect of the decision that the charter itself was a contract between the state and the corporation, so as to enable the state to impose such salutary restraint upon these bodies as experience might, prove to be necessary. But I suppose it would hardly be claimed that the state, even where this power of amendment is reserved, could, by amending the charter of a railroad company so as to provide for a new and entirely different road, impose any obligation on the corporation to build it. It might possibly repeal the old charter, but whether the company would undertake the enterprise provided for in the amendment, would still depend entirely upon its own consent; as it is well settled that a grant of corporate franchise cannot be imposed upon any person against their consent, any more than any other grant. Undoubtedly the legislature might, under this power, impose new duties and new restraints upon corporations in the prosecution of the enterprises already undertaken. And provisions of this nature would be binding, whether assented to or not. But when it comes to a question of embarking in a new enterprise, the legislature cannot impose this as a duty upon any corporation. All 'it can do is to grant it the power, and then it is for the corporation to accept it or not, as it pleases. So that, in all cases where charters are changed, the right to bind stock subscribers who do not assent seems to me to derive no additional support from the fact that the power of amending the charter has been reserved, but to depend essentially upon the question whether the change is of such a character that it may be deemed so far in furtherance of the original undertaking, and incidental to it, as to be fairly within the power of the corporation to bind its individual members by its corporate assent, or whether it is such a departure from the original purpose that no member should be deemed to have authorized the corporation to assent to it for him.”

A case in which there is a full discussion as to the reserved power of alteration, amendment, or repeal of charters found in the constitutions of the different states is that of Garey et al v. St. Joe Mining Co., found in the 32 Utah at page 497. The three first syllabi, which are supported by the opinion, read as follows:

“1. A corporation’s charter is a contract between the state and the corporation, between the corporation and the stockholders, and between the stockholders and the state.

2. In granting charters or authorizing the creation of corporations under general laws, the state may expressly reserve the power of alteration, amendment, or repeal, and such reservation becomes a part of the contract between the state and the corporation, and is binding, not only upon the corporation, but also upon every individual stockholder.

3. Under the constitutional provision that all laws relating to corporations may be amended or repealed, and all corporations doing business in the state may as to such business be regulated or restrained by law, the state may not amend charters of existing corporations, so as to change the fundamental character of the corporation, impair the contractual relations or rights of the stockholders among themselves, or between the corporation and its stockholders; but the Legislature has the right to amend the charter or laws relating thereto, so far as the state is interested, to modify any right, privilege, or immunity granted by the state, to repeal the charter or all laws under which its was granted, to take away altogether the franchises and privileges granted under it, and to make such reasonable amendments or altérations deemed necessary to carry into effect the purpose to the grant or to protect the rights of the public, of the incorporation, and its stockholders, when such amendments or alterations will not defeat or substantially impair the object of the grant or any vested rights.”

In the body of the opinion the court say:

“The power can only be exercised to the extent that the state is interested. It can alter or modify any right, privilege, or immunity granted by it. It cannot, however, reach out and impair the obligations of contracts existing between the corporation and its members, or among the corporators themselves, any more than it can impair the obligations of contracts existing between other individuals.”

In support of this declaration the court quotes at length from Clark & Marshall on Private Corporations, Cook on Corporations, 5 Ed., Morawetz on Corporations, Beach on Private Corporations, Thompson’s Commentaries on the Law of Corporations, Black on Constitutional Law, Spelling on Private Corporations, and the opinion in the case of Zabriskie v. Hackensack, & N. Y. R. R. Co., 18 N. J. Eq. 178, in which case the court say:

“The object and purpose of these provisions are so plain and so plainly expressed in the words that it seems strange that any doubt could be raised concerning it. It was a reservation to the state for the benefit of the public to be exercised by the state only. The state was making what had been decided to be a contract and it reserved the power of change by altering, modifying, or repealing the contract.- Neither the words nor the circumstances nor apparent objects for which this provision was made can by any fair construction extend it to giving a power to one part of the corporators as against the other which they did not have before.”

And also a decision of the Supreme Court of Georgia in the case of Snook v. Georgia Improvement Co., 83 Ga. 61:

“It is also held that the charter of a corporation is a contract of a dual character; first, a contract between the state which grants the charter and the corporation; and, secondly, a contract betwen the corporation and its members. And while the state reserves the power to alter and amend the charter, and the corporation itself cannot object to the alteration or amendment, yet the state has no power to make any material or essential alteration in the contract between the members themselves and the corporation.”

In the third edition of Thompson on Corporations, at Sec. 362, the author says:

“This right of protection against even a reserved power to amend is neither strange nor fanciful. It is not only supported by cogent reasons but it finds a solid footing in a constitutional provision. A reserved right to amend, whether in a charter, a general law, or a constitution, must go hand in hand with the other familiar and fundamental constitutional provisions that no law can be passed impairing the obligations of contracts and that property cannot be taken without due process of law and without just compensation.”

And, again, in Section 363:

“Under this reserved right to amend, the state cannot so legislate as to disturb, affect, or impair rights, either of the corporation or of its shareholders, previously acquired in the lawful exercise of the corporate functions. All rights thus acquired, of whatever character, are surrounded and protected by constitutional sanctions and guaranties higher than and superior to the legislative power of amendment or repeal.”

We also refer to the case of Gerber v. American Seeding Machine Co., found in the 28 O. N. P. (N. S.), at page 20, which we understand was affirmed by a majority opinion of the Court of Appeals, and in which the opinion of the nisi prius court was in accord with the authorities we have before cited.

It does not appear that this plaintiff is entitled to be designated a dissenting shareholder under the provisions of General Code, Section 8623-72, as he failed to avail himself of the remedy there provided by proper objection in writing to the action taken, and by demanding in writing the payment of the fair cash value of his shares. In view of the above authorities we do not regard ourselves as concerned with that clause of Section 8623-72 which provides:

“Any shareholder who does not object and demand in writing the payment of the fair cash value of his shares in the manner and at the time herein provided shall be concluded by the vote of the assenting shareholders.”

He is dissatisfied and did not dissent by notice and demand. He stands upon his rights as a shareholder, insists upon his contract, and claims the preferences specified in his stock certificate. If the constitutional prohibition against the impairment of the obligation of contracts protects him from legislation, which will deprive him of the benefits of his contract relation with the corporation, we are of the opinion that he may insist upon his contract being recognized by the corporation. He has waived nothing and has lost nothing, and the ordinary equitable remedies are open to him for the enforcement of his contract rights. Neither public nor business policy may be resorted to for the nullification of a constitutional provision. Nor should the fact that his shares are few be allowed to mitigate against his right to complain. By the adoption of the amendment to its articles of incorporation, plaintiffs convertible stock was not converted into common stock without par value; and while thereupon he had the privilege, if he saw fit, to waive his contract rights and exchange the certificate which he now holds for a certificate of ten shares of common stock without par value, he at the same time had the right to decline to do so (as he has done), and still is entitled to the priorities and preferences found in his original certificate and he is awarded the relief prayed for in his petition. A decree may be entered accordingly.  