GRAHAM

Action by the First National Bank of Canton, Ohio, against Mary D. Shanks and others for a declaratory judgment as to validity of by-law restriction which required stockholders to first offer stock to other stockholders, wherein defendant Court Square Mortgage Loan Company filed a cross-petition.

Petition and cross-petition denied.Russell Burt and John Miller, both of Canton, for First Nat. Bank of canton. Luther Day, of Cleveland, and Frederic Wilkins, of Canton, for Mary D. Shanks and others.
James L. Amerman and D. Bruce Mansfield, both of Canton, for Court Square Mortg. Loan Co.

GRAHAM, Judge.

In 1915 The Market Avenue Realty Company was incorporated and 1500 shares were eventually issued and with the exception of several qualifying shares they were all owned by Eunice Clark. The corporation took title to what is known as the Clark Building and shortly after its incorporation, the Clark homestead, which was occupied by the Clark family, was deeded to it. The corporation acquired title to some other real estate.

Subsequently C. B. Clark, son of Eunice Clark, increased his holdings in the corporation. A. B. Clark borrowed money from The First National Bank and pledged as security 199 of the shares he owned. He also borrowed money from The First Trust ans Savings Bank (The Court Square Mortgage Loan Company now being the holding and liquidating corporation of that Bank) and pledged as collateral 598 of his shares.

A. B. Clark is now deceased and after his death, the two banks, not having been paid the money owed by Clark, offered the collateral for sale to satisfy the loans, and each bank bought in the stock pledged with it, to which transfer no objections were raised.

This action for a declaratory judgment was instituted by The First National Bank. Members of the Clark family and The Court Square Mortgage Loan Company were made defendants.

The case resolves itself into a determination of whether the restriction, which required the stockholder to first offer the stock to the other stockholders, which restriction was provided for in a by-law adopted by the stockholders immediately after the corporation was formed, and which was printed on the certificate of stock, was ever of any effect, and if it was, has anything occurred which would cause it to lose its effectiveness.

The plaintiff claims the restriction is (1) void ab initio; (2) has been waived; (3) the shareholders are estopped to enforce the restriction; (4) that the restriction is of no effect because of laches on the part of the stockholders.

Upon the cross-petition of The Court Square Mortgage Loan Company, which was made a party defendant, the further question arises as to whether that company is bound on the theory of contract, that claim being made on the bases that it was not a party to the contract between the stockholders by which this restriction was agreed upon. Also, The Court Square Mortgage Loan Company claims that it could not be bound because it is a liquidating company and subject only to the control of the Court.

Taking up at this point solely the question of whether this is a reasonable restriction and disregarding any question of its statutory legality, or its legality as a contract, the weight of authority is that a restriction of this kind is reasonable. 62 A.L.R., page 1168;138 A.L.R., page 650; Vol. 8 Fletcher Cyclopedia, Corporation, page 787; 18 C.J.S., Corporations, § 391, page 924; 13 Am.Jurisprudence, page 413; Vol. 1 Thompson on Corporations, 3d Ed., page 21. There is a distinct dissimilarity between a restriction which required approval of the corporation or its directors or stockholders before a transfer of shares of stock can be had, and a restriction that merely gives the corporation or the stockholders an option. The former is capable of becoming a permanent restriction, whereas the latter is only a temporary restriction adopted with the best interests of the corporation in mind. In the instant case we observe that we have a situation where the corporation was organized to take over family real estate and that the purpose of this option was to keep control of the corporation in the family.

In passing on this phase of the case that it had before it, the Court, in Moses v. Soule, 63 Misc. 203, 118 N.Y.S. 410, 414, said : ‘In the management of corporations few things are more apparent than the desireto keep the control of the same in the hands of people who are congenial to the enterprise and to those who manage its affairs. A quarreling directorate is a misfortune to the stockholders of any corporation.’

It follows that the Court said such restriction was reasonable. In Lawson v. Household Finance Corporation, 17 Del.Ch. 1, 147 A. 312, 315, the court, in commenting on a similar restriction, said: ‘There is thus no attempt made to inhibit the stockholder from ever disposing of his stock. There is an attempt made to compel the stockholder to deal first with only one of the possible purchasers * * * if that purchaser refuses the stock, then it is liberated from all restraints.’

Again, in Barrett v. King, 181 Mass. 476, 63 N.E. 934, 935, the Court said: ‘Stock in a corporation is not merely property. It also creates a personal relation analogous otherwise than technically to a partnership. Nothwithstanding decisions under statutes, * * * there seems to be no greater objection to retaining the right of choosing one's associates in a corporation than in a firm.’

In Nicholson v. Franklin Brewing Company, 82 Ohio St. 94, 91 N.E. 991, 995,137 Am.St.Rep. 764,19 Ann.Cas. 699, the Supreme Court of Ohio evidently recognized the reasonableness of such a restriction, when it said: ‘The by-law here called in question contains no suggestion of a purpose to prevent the alienation of stock nor to restrict it beyond reason suggested by a consideration of the welfare of the corporation and the express provisions of the statutes.’

It is to be noted that in practically all of the cases where restrictions have been held to be invalid, the Courts have based their judgments on the fact that the restriction was a permanent prohibition. Miller v. Farmers' Milling & Elevator Co., 78 Neb. 441, 110 N.W. 995,126 Am.St.Rep. 606;Morris v. Hussong Dyeing Mach Co., 81 N.J.Eq., 256, 86 A. 1026;Bloomingdale v. Bloomingdale, 107 Misc. 646, 177 N.Y.S. 873;Prindiville v. Johnson & Higgins, 92 N.J.Eq. 515, 113 A. 915. We conclude, assuming that there is legal authority for this restriction, that it is a reasonable one.

The next question to be decided is as to whether this limitation is valid as a by-law. This Court does not believe it to be. In Nicholson v. Franklin Brewing Company, 82 Ohio St. 94, 91 N.E. 991, 994,137 Am.St.Rep. 764,19 Ann.Cas. 699, it was determined that a similar restriction was valid only because a statute of the State of Delaware in which State the corporate charter was granted, expressly authorized the corporation to make by-laws ‘for the management of its property, the regulation and government of its affairs, and for the certification and transfer of its stock.’ Laws Del. 1901-03, c. 394, § 2, par. 6. The Court said ‘effective regulations of the transfer of stock in a corporation must be prescribed in statutes or in by-laws of the corporation which are not inconsistent with the statute.’ The Court goes on to say, ‘when statutes under which corporations are formed authorize them to make by-laws upon specifically named subjects there is an implied denial of authority to make by-laws upon subjects not named.’

Furthermore, we do not believe any change in the statutes in 1911 altered the situation. Counsel for Shanks assert that G.C. § 8673-15 adopted in 1911, gave the corporation the authority. G.C. § 8673-15 granted no right to a corporation to make restrictions, but merely stated: ‘* * * and there shall be no restriction upon the transfer of shares so represented by virtue of any by-law of such corporation, or otherwise, * * * unless the * * * restriction is stated upon the certificate.’

The enactment of the uniform stock transfer Act by the Ohio Legislature in 1911, Gen.Code, § 8673-1 et seq., was intended to be simply a codification of the laws as to the transfer of stock already in effect in Ohio, at that time, but the laws of Ohio at that time did not provide for by-laws restricting transfers of stock. We can only surmise that the draft of the bill before the Legislature had been copied from the laws of some other state where the Uniform Stock Transfer Law had been enacted, and in which state the right to adopt by-laws restricting transfers of stock had been recognized, and some advisor to the State Legislature assumed that such by-laws were valid in Ohio, and as a result G.C. § 8673-15 was enacted, which, insofar as we are concerned with it in this case, was, at the time of its enactment and in 1915, meaningless. Later on the Legislature enacted G.C. § 8623-12 in order to provide authority to corporations to make such a by-law.

Under the Statutes in effect at the time the Ohio Supreme Court rendered this opinion, we are convinced that if the Nicholson Company had been incorporated under Ohio Laws, the Court would have been obliged to hold such restriction invalid, because such authority was not prescribed in the statutes. The same year (1910), the same Court affirmed, in the case of W. M. Pattison Supply Co. v. Harvey, 82 Ohio St. 390, 92 N.E. 1126, a judgment of the Circuit Court of Cuyahoga County (16 O.C.C.,N.S., 42), by which Court it had been held that a by-law of a concern incorporated under the laws of Ohio, which by-law required a stockholder to give the board of directors an opportunity to purchase his stock before it could be transferred to a person not a stockholder, was invalid. If such a transfer was invalid under our laws of 1910, as our Supreme Court has said it was, we believe it necessarily follows that a similar by-law was invalid in 1915 when The Market Avenue Realty Company received a charter.

The law, under which corporations were granted the right to adopt a code of regulations, gave the corporation no greater authority in 1915 than it did in 1910 when our Supreme Court decided W. M. Pattison Supply Co. v. Harvey. Section 3249 of the Revised Statutes of Ohio for 1880, read: ‘Every corporation may adopt a code of regulations for its government, not inconsistent with the constitution and laws of the state,’ and when Section 8701, Gen.Code, which supplanted Section 3249, was enacted in 1911, the only change made was to substitute the words ‘consistent with’ for ‘not inconsistent with.’ The identical substitution of words was made when Section 3250 of the Revised Statutes of Ohio in 1880 was amended, and became Section 8702 of Gen.Code. It was not until several years later when G.C. § 8623-12 was enacted that such a by-law was authorized by Statute. Furthermore, Section 3254, Revised Statutes of Ohio of 1880, which counsel for the defendant Shanks says was the only matter that the Court attempted to construe in W. M. Pattison Supply Co. v. Harvey, was amended in 1911, and then became Sections 8672 and 8673, Gen.Code, and they then read:

‘Sec. 8672. Upon his demand therefor, of the president or secretary of the company, they shall execute and deliver to any stockholder a certificate showing the true amount of paid up stock therein, held by him.’

‘Sec. 8673. The directors of such corporation, when organized, shall keep a record of all stock subscribed and transferred, and its secretary or recording officer shall register all subscriptions and transfers of stock. For that purpose a book shall be kept, and when a certificate of stock is assigned and delivered by a stockholder, the assignee thereof on demand may have it duly transferred therein by such officer, who at the same time shall enroll also the name of the assignee as a stockholder. The books and records of such corporation at all reasonable times shall be open to the inspection of every stockholder.’

The Court fails to see how these statutes gave the restriction in question any greater validity than the statute which W. M. Pattison Supply Co. v. Harvey undertook to construe.

At the time this by-law in question was passed, the Ohio law did not provide that ‘the shares of stock in every corporation shall be deemed * * * transferrable on the books of the corporation in such manner and under such regulations as the by-laws provide’ as did the Delaware Statute, Laws 1901-03, c. 394, § 16, which our Supreme Court in Nicholson v. Franklin Brewing Company, 82 Ohio St. 94, 91 N.E. 991, 994,137 Am.St.Rep. 764,19 Ann.Cas. 699, said gave the corporation a right to pass such a by-law. Sections 8672 and 8673, Gen.Code, as above quoted, did not go that far.

In addition to our conclusion that in Ohio the restriction in question had no validity as a by-law in 1915, we further doubt if the validity of such a restriction would be generally conceded as counsel for the defendant Shanks claim. Counsel for Shanks in one of their Briefs quote the following from the Transfer of Stock (Second Edition, 1940) by Christy and McLean, at page 75: ‘By the weight of authority, a by-law provision requiring a stockholder who desires to sell his stock to first offer it to the corporation or to the stockholders at a price which may reasonably be ascertained, and allowing such stockholder to transfer his stock if the option to purchase is not exercised within a reasonable time, is valid.’

However, the next sentence of the same paragraph just quoted goes on to state: ‘But it has been said that such a by-law provision is valid only where it is authorized by statute, or by the charter, or is reasonably necessary to the business of the corporation.’

And we believe, at least in some of the cases cited under this paragraph by Christy and McLean, that the claim of counsel for Shanks, that the validity of such corporate by-laws are generally recognized, is not supported. For instance in Lawson v. Household Finance Corporation, 17 Del. Ch. 12, 147 A. 312, the charter issued by the State permitted such a by-law. Barrett v. King, 181 Mass. 476, 63 N.E. 934, does not attempt to say the restriction was valid as a by-law. Neither does Doss v. Yingling, 95 Ind.App. 494, 172 N.E. 801, nor Baumohl v. Goldstein, 95 N.J.Eq. 597, 124 A. 118. The weight of authority appears to be expressed in Thompson on Corporations, Vol. 6, Section 4158, which reads: ‘The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself can not create such impediments.’

Also, in support of Thompson, we cite Ireland v. Globe Milling Co., 21 R.I. 9, 41 A. 258;Brinkerhoff-Farris Trust & Savings Co. v. Home Lumber Co., 118 Mo. 447, 24 S.W. 129;Baumohl v. Goldstein, 95 N.J.Eq. 597, 124 A. 118;Lufkin Rule Co. v. Secretary of State, 163 Mich. 30, 127 N.W. 784;Howe v. Roberts, 209 Ala. 80, 95 So. 344;Prindiville v. Johnson & Higgins, 92 N.J.Eq. 515, 113 A. 915;Driscoll v. West Bradley & Cary Mfg. Co., 59 N.Y. 96;Robertson v. L. Nicholes Co., 141 Misc. 660, 253 N.Y.S. 76;Krauss v. Kuechler, 300 Mass. 346, 15 N.E.2d 207, 117 A.L.R., 1355;Farmers' Mercantile & Supply Company v. Laun, 146 Wis. 252, 131 N.W. 366; Contra: Hassel v. Pohle, 214 App.Div. 654, 212 N.Y.S. 561 ;Vannucci v. Pedrini, 217 Cal. 138, 17 P.2d 706;Sterling Loan & Investment Co. v. Litel, 75 Colo. 34, 223 P. 753.

If the restriction is not valid as a by-law, is it valid as a contract? The Court will not discuss at length the question as to the validity of this restriction as a contract, for the texts all agree that options of this kind are binding between the stockholders as contracts and the Court decisions overwhelmingly approve of them. 65 A.L.R. 1168; 138 A.L.R. 651; Fletcher on Corp. Vol. 8, page 736; 13 Am.Jur. page 412; Barrett v. King, 181 Mass. 476, 63 N.E. 934;Farmers' Mercantile & Supply Co. v. Laun, 146 Wis. 252, 131 N.W. 366;Searles v. Bar Harbor Banking & Trust Co., 128 Me. 34, 145 A. 391, 65 A.L.R. 1154;Garrett v. Philadelphia Lawn Mower Co., 39 Pa.Super. 78;Hassel v. Pohle, 214 App.Div. 654, 212 N.Y.S. 561;Krauss v. Kuechler, 300 Mass. 346, 15 N.E.2d 207, 117 A.L.R. 1355;Vannucci v. Pedrini, 217 Cal. 138, 17 P.2d 706;Jennings v. Bank of California, 79 Cal. 323, 21 P. 852,5 L.R.A. 233, 12 Am.St.Rep. 145;Doss v. Yingling, 95 Ind.App. 494, 172 N.E. 801;Prindiville v. Johnson & Higgins, 92 N.J.Eq. 515, 113 A. 915;Rychwalski v. Baranowski, 205 Wis. 193, 236 N.W. 131;Sterling Loan & Investment Co. v. Litel, 75 Colo. 34, 223 P. 753;Lawson v. Household Finance Corporation, 17 Del.Ch. 343,152 A. 753;Brinkerhoff-Farris Trust & Savings Co. v. Home Lbr. Co., 118 Mo. 447, 24 S.W. 129.

All the stock of The Market Avenue Realty Company, consisting of 1500 shares was originally held by Eunice Clark, except for qualifying shares which were issued to members of her family. Upon her death, except for the qualifying shares, the 1500 shares were distributed among her three children. The corporation owned what is known as the Clark Building, and also the Clark homestead. It was a family corporation. That fact is not only apparent from the list of stockholders, but is emphasized by the fact that the homestead was deeded over to the corporation shortly after its organization. The transfers of single shares made to representatives of the banks which had loaned money to A. B. Clark, were made in an effort to protect the loans the bank made. All of these transfers were without consideration. The transfer to Homer Black was to qualify him to serve on the board of directors as a legal representative of Mary D. Shanks. The transfer to Olive Clark kept the stock in the family which was the very purpose of the restriction.

The plaintiff claims that the shareholders by permitting these transfers have waived any right they had, if they ever had such right, and relies upon the following from 18 C.J.S., Corporations, § 391, page 926: ‘The right to such option may be waived by the persons entitled thereto, and where a transfer of certain stock is permitted to be made the inference therefrom is that the opportunity to purchase has been offered and declined, or that the requirement has been waived, ‘and another purchaser of the stock is entitled to all the rights of a bona fide purchaser.’ But the next sentence of the same statement reads: ‘The mere fact that in several instances stock has been sold by one stockholder to another without a compliance with such requirement does not annul the requirement by waiver.’

The transfer of individual shares were either made to protect the family's interest or the interest the banks had by way of protecting their respective loans. There were no numerous deals of blocks of shares, and none were ever sold on the open market. If there had been, and the other shareholders had permitted them to be transferred, then, no doubt, a waiver would have taken place. We cannot conclude that A. B. Clark, when he pledged the shares as security, had any intention of permanently parting with them. ‘The only purpose’ of this restriction ‘was to give to those owning stock the right and privilege to keep the control of the corporation in the hands of those who are its friends and friendly to those intrusted with the administration of its prudential affairs.’ Doss v. Yingling, 95 Ind.App. 494, 172 N.E. 801, 803.

Both The First National Bank and The Court Square Mortgage Loan Company accepted the certificates of stock with the knowledge of the restriction, for it was printed on the face of the certificates, and when The First National Bank and The Court Square Mortgage Loan Company bought the stock, they bought it with notice of the restriction. The fact that the Clark family raised no objection to the transfer on the books of the corporation to The First National Bank and The Court Square Mortgage Loan Company has not changed the effectiveness of the agreement. Hassel v. Pohle, et al., 214 App.Div. 654, 212 N.Y.S. 561;Doss v. Yingling, 95 Ind.App. 494, 172 N.E. 801. These institutions acquired the stock with notice of the restriction, and merely because the other stockholders did not at that time insist upon the stock being first offered to them, does not destroy the effectiveness of the agreement.

Neither The First National Bank nor The Court Square Mortgage Loan Company bought the stock as an investment, nor with any intention of remaining stockholders. Their only purpose in buying it was to dispose of the loans made to A. B. Clark which had been carried on their books for a number of years. When the representatives of The First National Bank and The Court Square Mortgage Loan Company voted to obtain a loan from The Penn Mutual Life Insurance Company, which was secured by a mortgage on the Clark Building, they were still doing nothing more than endeavoring to protect their respective interests, and were not acting in a way antagonistic to the best interests of the Clark family. So far as the Clark stockholders were concerned, nothing occurred, during the time The First National Bank and The Court Square Mortgage Loan Company has held this stock that destroyed the family's right to control the corporation. Now, it is proposed to transfer this stock, and the control of the corporation, to some unnamed person, and for the first time the Clarks have reason to have cause for concern. If the Clarks permitted this transaction to take place, then they probably would waive their right under this restriction. Sales by a bank of pledged stock to satisfy the bank's claim against the pledgor are not contemplated in this restriction. ‘The clause relates only to voluntary sales and not to judicial sales.’ Barrows v. National Rubber Co., 12 R.I. 173. ‘It is obvious that the restriction looks to a sale and has no natural application to a pledge of stock which does not transfer title as a mortgage does.’ Good Fellows Associates v. Silverman, 283 Mass. 173, 186 N.E. 48, 50.

It might also be true that if someone, other than The First National Bank of The Court Square Mortgage Loan Company, had purchased this stock, without notice, at the time it was offered for sale, that person could now require a transfer to his name. McDonald v. Farley & Loetscher Mfg. Co., 226 Lowa 53, 283 N.W. 261. But here these two institutions having accepted the stock as security, with notice of the restriction, are not in the position of innocent purchasers.

Since a waiver is an intentional relinquishment of a known right, Russell v. Fourth Nat. Bank, 102 Ohio St. 248, 131 N.E. 726, and since we find no evidence of any act which would constitute an intention on the part of these stockholders to relinquish their right to have friends as shareholders, we must conclude there was no waiver on the part of the remaining shareholders. Good Fellows Associates v. Silverman, 283 Mass. 173, 186 N.E. 48;Crescent City Seltzer & Mineral Water Mfg. Co. v. Deblieux, 40 La.Ann. 155, 3 So. 726; Thompson on Corporations, Sec. 4156; 18 C.J.S., Corporations, § 391, page 926.

Also, from the facts in this case (assuming the foregoing reasoning is sound) the stockholders were under no obligation to act to protect the right they had under this restriction until some proposed transferee, without notice, attempted to compel the transference of the stock to him. That has not yet occurred, and, therefore, the stockholders have not yet been guilty of laches.

Furthermore, there is no evidence that the stockholders, by word or conduct, wilfully caused The First National Bank or The Court Square Mortgage Loan Company to believe that the remaining stockholders would forego any right they had under this restriction to keep control of the corporation in friendly hands. Therefore, the remaining stockholders cannot be said to be estopped.

The Court is of the opinion that The Court Square Mortgage Loan Company is in the same position as The First National Bank and we find no reason why the fact that it is a liquidating company alters its position.

It is the Court's conclusion, therefore:

(a) that the shareholders of The Market Avenue Realty Company have not waived any right originally acquired by them as to this option to purchase;

(b) that the shareholders of The Market Avenue Realty Company have done nothing or have they failed to do anything which would estop them to assert the enforceability of this contract of option;

(c) that the shareholders of The Market Avenue Realty Company cannot deny the ownership of the 200 shares in the plaintiff;

(d) that the plaintiff possesses full power and authority to participate in the corporate affairs of The Market Avenue Realty Company and to exercise its full voting rights as to said stock;

(e) that the plaintiff and The Court Square Mortgage Loan Company have authority as shareholders of The Market Avenue Realty Company to participate in and vote upon the activities of said company;

(f) that the plaintiff does not have the power to sell, assign and transfer its shares to person or persons not now a shareholder of said company without regard to the restrictive provisions;

(g) that the plaintiff and The Court Square Mortgage Loan Company are in law and fact shareholders of The Market Avenue Realty Company.

It is the Court's conclusion, therefore, that the restriction in question is not valid as a by-law because it lacked statutory authority, but that, being a reasonable restriction, it is valid as a contract between the stockholders and that The First National Bank and The Court Square Mortgage Loan Company having acquired this stock with notice of the restriction are bound by it.

The Court also finds that the defendant Shanks and the Clarks, who are stockholders, have not waived any right that they may have under this restriction, and neither have they been guilty of laches, nor are they estopped from asserting their right that the stock be first offered to them.

Accordingly, the relief, as prayed for by The First National Bank in its petition, and by The Court Square Mortgage Loan Company in its cross-petition will be denied.

Counsel for Shanks will furnish Entry, with exceptions to The First National Bank and The Court Square Mortgage Loan Company.