Continental Varnish & Paint Co. v. Secretary of State

Grant, J. (after stating the facts). 1. The relator sought to accomplish two objects by the resolution of February 4th, viz., the increase of the capital stock, and the division of the stock into “ common” and “ preferred.” Subdivision 4 of section 2 of the act (2 Comp. Laws, § 7038) provides that, when the capital stock of the corporation is increased or diminished, the president and a majority of the directors shall make a certificate thereof. The certificate in this case was signed by the president and secretary, and not by any of the directors. Section 17 (2 Comp. Laws, § 7053) provides that the articles of association may be amended, by a vote of two-thirds of the capital stock, in a-manner not inconsistent with the provisions of this act, but such amendment shall not become operative until a copy of the resolution, signed by the president and secretary, shall have been recorded. Section 38 (2 Comp. Laws, § 7073) provides for the issue of “common” and “preferred” stock. The closing paragraph of that section provides that, by a vote of three-fourths of its stock, such corporation may amend its articles so as to issue preferred and common stock, “ in the same manner and with the same effect as is now provided by section 17 of this act, relating to amending articles of association.” There is nothing in section 38 authorizing an increase of the capital stock. If the corporation desires to increase its capital stock, and at the same time to provide for the two kinds, it must proceed under subdivision 4 of section 2, and present a certificate to be filed [624] as required by that section. Sections 17 and 38 do not nullify the provisions of section 2 as to increasing the capital stock. They refer to other amendments than those increasing or diminishing the stock. The certificate, therefore, was not- in compliance with the statute. 2. The statute (section 38; 2 Comp. Laws, § 7073) provides that the preferred stock shall at no time exceed two-thirds of the actual capital paid in. It is conceded that the entire stock has not been paid in, and that the issue of, $50,000 of preferred stock would be in violation of the statute. The relator, however, contends that it is entitled to have the amendment recorded and filed, and that the restriction then limits the directors in issuing the preferred stock to an amount not exceeding two-thirds of the capital stock as it may from time to time be paid in. We do not think this the proper construction. The resolution increasing the capital stock to $150,000, and providing for preference shares, does not state how much of the capital has been paid in. The original articles, as filed, are required to show the amount of capital actually paid in. The annual report of the corporation requires a similar statement. But after one report is filed there is no public record of the payment of any more capital stock until the next annual report. Dishonest directors, if the contention of the relator be sustained, might during this time issue the whole of the preferred stock upon their assurance to its purchasers that the whole capital stock was paid. The entire preferred capital stock might be sold at the same time to different parties. In such case it would be impossible to tell what stock was issued first, and what, therefore, was in violation of law. We think it was the purpose of the law to render impossible such a condition of affairs, and that the law means that no preferred stock can be authorized beyond two-thirds of the amount of capital actually paid in at the time of authorizing the issue. This construction prevents any opportunity on the part of dishonest directors to commit fraud, and imposes no hardship or inconvenience. The stockholders are presumed to [625] know the condition of the company, and how much money they want to borrow by the issue of preferred stock in order to continue business. Should they desire to raise more money in the same manner, another meeting can be called. 3. The other remaining question is, Must the. entire capital stock of a corporation, under this act, be subscribed, or can three or more corporators subscribe for one-tenth of the capital stock, pay that in, and then say that they are a duly-organized corporation? It does not need much argument to demonstrate the fallacy of this position. The capital stock in many cases is the chief asset of the corporation. The theory is that those dealing with it have the right to assume that this stock is all in the hands of bona fide subscribers, liable to assessment to pay the debts of the corporation. There is no statute in this State prohibiting a corporation from incurring debts or borrowing money until all its stock is fully paid. All the law now requires is that the stock be subscribed, and that a certain percentage thereof be paid in, and then the corporation can proceed to business and incur debts without calling upon the stockholders for further assessments. It is, in my judgment, a very pernicious policy, but that is a matter for the legislature, and not for the courts. There is no such thing as capital stock until it is issued and owned by the subscribers or purchasers: Relator’s counsel insist that a corporation with $100,000 capital requires only $10,000 of it to be actually subscribed, and the other $90,000 may remain in the treasury, as “treasury stock.” This $90,000 of treasury stock is obviously of no value as an asset. The directors cannot be compelled to issue it, and nobody can be compelled to buy it. Such a corporation would virtually have a $10,000 capital, and that all paid in, with no further liability on the part of those who have taken the $10,000, because their stock is fully paid up. While the statute contains no express requirement that all the stock must be subscribed, we think it clearly con [626] templates this, in order to constitute it a corporation de jure. We are not dealing with those cases where the courts have held corporations to be corporations de facto, though not de jure, where they have not complied with the law. In such cases stockholders are properly held estopped from setting up such defenses. We are dealing with a case where the secretary of state declines to recognize such a corporation as a de jure one until it has complied with all the requirements of the law. We think this conclusion is fully sustained by the reasoning in the case of International Fair & Exposition Ass'n v. Walker, 88 Mich. 62 (49 N. W. 1086),' in which it was said, “ The capital stock authorized is the lifeblood of the corporation.” See, also, page 79 of that opinion. Undoubtedly, if the relator had filed its articles of association, the corporation would have been a de facto one. But the respondent very properly replied to relator’s application to file these amendments, “ I insist that you become a de jure corporation, as well as a defacto one.” Counsel quote a sentence from American Mirror & Glass-Beveling Co. v. Bulkley, 107 Mich. 447 (65 N. W. 291), in support of their contention. That case was written by the writer of this opinion. The sentence quoted is as follows: “The act [the same one as that now under consideration] does not provide that the entire capital stock shall be subscribed as a condition precedent to its organization and the right to carry on business.” The defendant in that case had paid in full for her stock. The attempt was made to hold her for the stock which had not been subscribed. The logical conclusion from that case is that, had she been a party to the fraud in organizing the corporation and in carrying it on, without the issuance of the entire capital stock, she would have been liable. Standing alone, the sentence quoted might naturally bear the construction placed upon it by counsel; but, read in connection with the facts of the case, [627] it cannot be so construed. It was a case of a de facto, not a de jure, corporation. For these reasons, the respondent was right in refusing to file the certificate of the amendment, and the writ is denied. The other Justices concurred.