Story Case

Irving Powell and Julius Frankel had discovered a very rich mine, which they had transferred to a corporation which they had formed, called the Sunrise Mines, Limited. They had retained the control of the corporation, by each holding thirty per cent of the stock. The corporation accumulated a surplus of $20,000 during the profitable years, and then the mine began to give out in certain sections, so that the operations were somewhat reduced. As this resulted in liberating some of the original capital, the corporation had in its hands $20,000 more than it actually required in its work. Since there were indications that even more of the activities would have to be given up, Powell and Frankel were anxious to get their money out of the company. As directors, they adopted a resolution which, as a majority of the stockholders, they ratified, providing that the corporation would use the $40,000 available, to accept the offer received by the corporation, from Irving Powell and Julius Frankel to sell to the corporation four hundred shares of its own stock at par. The resolution recited that the stock was fairly worth on the open market more than $100 a share, and probably about $125 a share, because of the continued payment of regular dividends and the accumulation of the surplus; it further recited that the offer was being accepted, in part because of the advantage it would be to the corporation to reduce its capital, which had become more than its plant required, or could pay usual dividends upon, and to diminish the amount of the capital stock liability. A bill was immediately filed in a court of equity, by Albert Spaulding, the holder of five shares of stock, against the Sunrise Mines, Limited, and Irving Powell and Julius Frankel, directors, asking the Court to enjoin the corporation from carrying out the agreement or the directors from paying out the money, and asking that the contract be declared void and beyond the powers of the corporation. The answer denied that the complainant had any cause for his objection, and showed that, whereas, before the sale his shares would be worth nominally 1-1000 of the combined capital and surplus of $120,000, or $120 apiece, after the proposed sale, he would have an interest in the 400 shares held by the corporation, or in effect a 1-600 interest in a capital investment reduced only to $80,000, in other words $133.33 per share.

Should the Court interfere?

Ruling Court Case. Coppin Vs. Greenless Company, Volume 38 Ohio State Reports, Page 275

This suit was brought upon a contract made by the Greenless Company to buy some of its own stock from Coppin. The company urged that it was not within its power to make such a contract and that it should not, therefore, be held liable.

Mr. Justice Mcllvaine delivered the opinion of the Court. It was recognized that the decisions of different courts in different states were not all harmonious, and that some courts had held that a corporation could buy, hold and sell its own stock. But, said the Court, "We think the decided weight of authority both in England and in the United States, is against the existence of the power, unless conferred by express grant, or clear implication. There is an admitted exception to the rule, in that corporations are allowed to take their own stock, in satisfaction of debts due to them or upon the foreclosure of liens for subscriptions or assessments, or where it is otherwise acquired, incidentally to a transaction in the ordinary course of business. It is also proper for a corporation which is accumulating surplus profits, to apply some of these to the purchase of its own stock, thereby, reducing the amount of outstanding capital. The creditors of the corporation are not injured by this, although it may be that any of the stock holders would have the right to object, because their proportion of responsibility for the corporation is increased. But where the sole object of the corporation is, as in this case, "for manufacturing purposes," it cannot be said in any just sense that the power to acquire, invest in, or convey its own stock was either necessary or convenient for "manufacturing purposes." If the right of a corporation to purchase its own stock at pleasure exists and is unlimited, it might buy every share so that the corporation alone would represent the stockholders who are assumed to be behind the corporation. Creditors have a right to assume that the capital represents an actual investment, and that the amount remains in the hands of the corporation and has not been paid back to those who subscribed it. Creditors do not have the security intended to be afforded by the law, if the corporation can pay out its assets in the purchase of its stock, whether it is held subject to be reissued or is considered to be extinct, because in either event the amount at stake by individual shareholders has been reduced."

Since the contract was not within the powers of the defendant corporation, it could not be enforced, and judgment was given for the defendant, the Greenless Company.

Ruling Law. Story Case Answer

Stock purchased by the corporation itself may be either cancelled and deducted from the outstanding capital, or it may be temporarily held by the corporation for resale, and in the mean time its dividends collected by the corporation like any other income. It is very common to provide in corporation charters that the corporation shall have power to purchase and hold its own stock and this provision will, in general, be valid and prevailing. Even without any such provision, a corporation has power to take its stock in the ordinary course of its affairs. For instance, it is common to provide that if the holder of any shares fails to pay promptly an assessment levied upon them, the corporation may declare forfeited, his shares, or may sell them at public sale, or may itself buy them for the amount of the assessment levied. Stock acquired in this way would ordinarily be held as treasury stock, to be sold at the first opportunity, or would be cancelled and added to the unissued or unsubscribed capital. Such a transaction would be fully within the ordinary powers of a corporation. But any purchases of its own stock for investment purchases only, or any purchases which have the result of turning the capital back to the shareholders, leaving the creditors holding an empty bag containing only liabilities, would not be sanctioned. Even without special provision in the charter, most courts would now uphold a purchase by a corporation of its own shares which would be paid for wholly from its surplus, leaving its full capital amount unimpaired, if the shares were held for resale. But even with express power, such a purchase must be a fair transaction. It can not be made to benefit some shareholders to the exclusion of others. The Court will not go into the question of actual values, but will set aside, at the application of any minority, a contract whereby some shareholders are given a privilege of receiving back their capital where the offer is not made to all upon equal terms. Without express power, a corporation can buy its own shares, only as an incident to other transactions which lead to that result, and with express power, it can do so, only where it is not to the detriment of the corporation's creditors or minority stockholders.

Powell and Frankel, in the Story Case will not be allowed to give themselves this opportunity, without throwing it open to all of the shareholders who choose to accept it. Even if Spaulding's shares are worth more, they are no longer shares in a $100,000 corporation, but represent a larger interest in a smaller corporation. This is very different, and can not be forced upon him. The Court should grant him the relief he asks, unless a scheme should be devised whereby all the stockholders could turn in some of their stock. Even then, it could be set aside by the creditors of the Sunrise Mines, Limited, unless it were limited to the $20,000 of surplus. If open to all, and if only the $20,000 were used, then the corporation should be allowed to give its stockholders for their shares what it could distribute merely as accumulated dividends, but even then some courts would not allow it to apply its surplus in an investment which was no part of the corporate business and not a necessary means of accomplishing some proper end.