Newport Cotton Mill Co. v. Mims

Beard, J. These consolidated causes consist of five bills filed in the Chancery Court of Cocke County by the Newport Cotton Mill Company against alleged subscribers to its stock for amounts alleged to be due by them on their respective stock subscriptions. The complainant seeks to recover of C. B. Mims, $500; of J. A. Baleh, $150; of J. J. Denton, $500; of I., M. Eubank, $250; and of W. C. Anderson, $750. The bills, except as to names and amounts, are substantially the same in each casej and aver that th.e complainant is a domestic corporation; that it was capitalized at $35,000, divided into shares of $100 each, and that each of the defendants 'agreed to take a number of — 467 — the shares of the capital stock, aggregating the above amounts, respectively; that calls had been made, and that defendants had failed and refused to pay. The bills aver, as originally tiled, that the “complainant has now in operation a great part of its plant, and is a going concern.” Subsequently, the corporation having fallen into insolvency, and this having been adjudged in another cause in that Court, and a receiver appointed to collect all outstanding claims due to the corporation, on motion supported by affidavit, the complainant was permitted to strike out the averment in the several bills of these consolidated causes that it was a going concern, and substitute therefor an allegation of this adjudged insolvency of the corporation and the appointment of a receiver of all its assets. Still 'later the receiver, on his petition, was made a party complainant. The separate answers of these defendants make a number of defenses, only one of which need be mentioned, as it is conclusive of these causes. This defense grows out of the agreement to take stock in the complainant corporation when it should be organized. This agreement was signed, with others, by these defendants, and was delivered to the corporation. No other subscription was ever made by, and no certificates were issued to, them. The right of recovery rests alone upon this written agreement, wffiich is as follows: — 468 — “We, the undersigned, citizens of Oocke County, Tennessee, have formed ourselves into an association for the purpose of organizing a corporation for tlie purpose of manufacturing cotton, wool, .and silk goods. It is understood that this corporation is to be organized in the following manner: The building known as the tobacco factory is to be put in by its owners for $10,00.0 of the stock of said corporation, $10,000 to be raised by the citizens of Cocke County, and $10,000 by James Lord, of South Carolina, and for the purpose of effecting this organization, we, the undersigned subscribers to the sums opposite our names, as part’ of the capital stock of said corporation, bind ourselves only in the event the said James Lord raises his part of the said capital stock. The said sums subscribed shall be paid as folloAvs: Twenty-five per cent, on perfection of organization, twenty-five per cent, sixty days thereafter, and ten per cent, every thirty days thereafter until the full amount is paid, making a total capital stock of $30,000.” The record discloses that this corporation had the right to fix by by-laws its capital stock, and that it was accordingly organized upon a basis of a capitalization of $35,000, divided into shares of $100 each. Disregarding the fact, that subsequently this was increased to $50,000, we have complainant seeking recovery against these defendants ujDon the distinct averment contained in each of these — 469 — bills, that “it was capitalized at $35,000, divided into shares of $100 each, and that the defendants subscribed for. and agreed to talce the number of shares of its capital stock,, as has already been set out,” while the defendants resist the recovery upon the . ground that they subscribed for shares in a corporation whose “total capital stock” was to be $30,000. Dismissing the contention of the defendants, which, however, has much of force in it, and is well sustained by authority, that there is a fatal variance between the contract alleged and that proven, we come to the more serious question: Can one who agrees to take shares of stock in a corporation to be organized upon a basis of capital stock aggregating $30,000, be forced to pay for shares in a corporation capitalized at $35,000, or any other different sum ? It would seem that this question would easily furnish its own answer, for to hold that this could be done would be to impose upon such an one an obligation which was in the face and in spite of his written contract. The rule is general that ' one has the right to stand upon the contract he has made. Pie cannot be compelled to accept a different contract, even if it be more favorable to him. Certainly he would not be forced against his will to take in lieu one less favorable in its terms. This rule applies with more than — 470 — ordinary force to a subscription for shares of stock of a corporation. Tbe influence and control which the shareholder can exercise in such a body depends upon the proportion, his holding bears to the entire capital stock. In the present case, upon the basis of a capitalization of $30,000, that one of these defendants who agreed to take five shares of one hundred dollars each, par value, of this stock would have a voting and controlling power in the management of its affairs of l-60th, while in the corporation capitalized at $35,000, this power would be reduced to l-70th. As the capital was increased, this power would be correspondingly diminished until in a company of large capitalization his influence, limited to the shares held by him, would be of no practical value in protecting his own interests, or in determining the business operations of the corporation. We think it clear that if these defendants can be held on 'the subscription which they made to pay for shares in this corporation, organized with a capital stock of $35,000, they might equally have been required to do so had the basis of capitalization been fixed at $100,000, or ’ any larger amount. Even where a corporation, with fixed capital, is in active operation, “an increase or reduction of the capital stock is such a fundamental change in its affairs that, although it has been duly an471 thorized by Act of tbe Legislature, or by tbe charter of incorporation, it cannot lawfully be effected merely by tbe act or assent of tbe board of directors, but must be authorized. by tbe shareholders at a corporate meeting.” 1 Cook on Stock and Stockholders and Corporation Laws, 285. In the Chicago City Railway Company v. Alerton, 18 Wall., 233, the Supreme Court of the United States, recognizing the vital character of the change, and the need of its being determined alone by the stockholders, say that for this rule “the reason .is obvious. ... To change it (the capital stock) without the consent of the stockholders, would be to make them members of an association in which they never consented to become such." It would change the relative influence, control, and profit of each member.” By analogy it would seem that where it was contemplated to capitalize a corporation to be organized in the future at $30,000, and a party agreed to take shares in its capital stock, and others interested in the enterprise, afterwards, for their own reasons, fixed the basis of organization at $35,000, the change would be so radical or fundamental as to relieve him from his special and limited obligation. And so it was distinctly held in Katama Land Company v. Jernigan, 126 Mass., 155, a case very similar to the one at bar. In that case the. subscription paper provided “that, whereas, the Katama — 472 — Land Company bad been incorporated, tbe capital stock of which corporation is fixed at $50,000; now, therefore, the undersigned hereby associate themselves together to form said corporation, and severally subscribe for and agree, éach with the other, and with said corporation, to take the number of shares in said corporation affixed to their respective names, and to pay therefor the sum of one hundred dollars per share at such times as shall be determined upon the organization of said corporation.” The defendant subscribed for ten shares, and the object of the suit was to hold him liable on that subscription. It appeared on the trial that subscriptions to a greater amount than $50,000 were obtained. At a meeting of the promoters and subscribers for shares in the corporation, upon a disclosure of this fact, it was agreed to fix (or as it was called by this meeting) to increase the .capital stock to $100,000, and it was also agreed or voted “that all the subscribers be now admitted to the company with the rights and privileges of stockholders under the agreement,” but it was held that this -could not create ' any' liability of the defendant under the agreement. . The Court said: “The contract contains two promises by the defendant: one that he would take ten shares of the par value of one hundred dollars each in a corporation of which the capital is fixed at fifty thousand dollars; and the other, which is collateral to the first, that he would pay — 473 — one hundred dollars upon each share at such times as should be determined by the corporation. • It was one of the essential conditions of each of these .promises that the capital stock of the corporation should be fifty thousand dollars. He agreed to take and to pay for one-fiftieth part of the capital stock of the corporation. If this action is maintained, he would be required to take one one-hundredth part of the capital stock, and this would impose upon him a contract different from that into which he entered.” Citing Atlantic Cotton Mills v. Abbott, 9 Cush., 423. An additional answer to the claim of complainant for recovery in these causes is, that an implied condition to the enforcement of payment of stock subscriptions is that the corporation shall have the power to issue shares' of stock to subscribers in compliance with their contract of ■ subscription. Railroad v. Knoxville, 98 Tenn., 2. And this, as is apparent, cannot be done by this corporation as capitalized. In regard to this defense, it is evident that the creditors represented here by the receiver can stand upon no higher ground than the corporation. The failure of the contract because of the violation of the “essential condition” as to the capital stock is an answer in the one case as well as in the other. It is contended, however, that as a matter of fact, this corporation was organized, with a capital — 474 — stock of $30,000, which was subsequently increased to $35,000, and that afterwards there was a »further increase to $50,000. This contention is rested upon the first finding of the Oourt of Ohancery Appeals that the subscriptions for shares of stock “more than completed the thirty thousand dollars specified in the subscription paper.” That Oourt, however, does not say when it was thus completed, and especially refrains from saying that the corporation, upon the basis of its being complete, fixed the capital stock at that sum. In a former part of this» finding that Oourt does say “its capital stock was ’ increased soon after its charter was granted . . .'to $35,000. The word “increased” was evidently used inadvertently for “fixed,” for in the supplemental finding made in response to a request that a definite report on this matter be made, that Oourt finds as follows: “We say that at a meeting of the stockholders of the company, May 8, 1896, by-laws for the corporation were adopted, and in these by-laws the capital stock was fixed at $35,000, . . . and that subsequently . it was increased to $50,000. The stockholders and directors took no other action in fixing the capital stock of the company.” This finding is' a conclusive answer to this contention. It is also insisted in argument that the defendants are, by their conduct, estopped to resist collection of their subscription. This insisten.ee cannot be maintained. As to Mims, it is true he — 475 — was a member of the first board of directors, but resigned after a short service and one month before the capital stock was fixed, and declined to have further connection with the corporation The defendants, Denton, Anderson,- and Balch • never attended a meeting of stockholders, nor, in any way, took part in the management of the affairs of the corporation. The ■ defendant Eubank attended only one. stockholders’ meeting, which was held over two months before that at which the capital stock was fixed. These facts afford a sufficient answer ,to this insistence-. Wondner v. Sharp, 4 C. B., 404; New H. Cent. R. R. Co. v. Johnson, 30 N. H., 390; Livesey v. Omaha Hotel Co., 5 Neb., 56; Oldtown & L. R. R. Co. v. Veazie, 39 Me., 571. Another equally conclusive is that complainant does not aver or rely upon the rule of estoppel or the doctrine of waiver in any of its bills. It results that the decree of the Court of Chancery Appeals is reversed, and that these bills must be dismissed.