Opinion
No. 27724
Decided March 27, 1940.
Constitutional law — Operative effect of law may determine constitutionality — Deprivation of property without notice or opportunity to be heard — Section 1, Article XIV, Amendments to U.S. Constitution — Corporations — Creating conclusive presumption favoring minority stockholders demanding fair cash value — Section 8623-72, General Code — Due process denied majority stockholders.
1. The constitutionality of a law may be determined by its operative effect.
2. A statute, the operative effect of which is to deprive a person of his property without notice and without opportunity to be heard before a competent tribunal, is violative of Section 1 of the 14th Amendment to the federal Constitution.
3. That part of Section 8623-72, General Code, creating a conclusive presumption in favor of minority stockholders of a corporation who have demanded the fair cash value of their shares constitutes a denial of due process to the majority in failing to afford them an opportunity to repel it, and has an unconstitutional operation.
APPEAL from the Court of Appeals of Franklin county.
This case is here on an appeal as of right and upon the allowance of the defendants' motion to require the Court of Appeals to certify its record.
The salient facts are that in 1925 The G.W. Bobb Company of Columbus, an Ohio corporation engaged in the wholesale grocery business, having encountered financial difficulties, decided to abandon business activities and dispose of its assets. The merchandise was sold promptly. Two pieces of real estate were left. One of these was sold in 1926 and the proceeds applied to the retirement of the preferred stock, the common stock being unaffected. In 1927 the name of the corporation was changed to The Neilston Warehouse Company, and the articles of incorporation amended to permit engagement in the business of warehousing. Defendants say this was intended as a temporary arrangement, to last only until the remaining real estate used for warehousing operations could be sold advantageously. Plaintiffs dispute the statement.
At any rate, a proposal for the purchase of such remaining real property was made in April of 1936 and rejected. In May of the same year another offer was made in the sum of $126,950, the prospective purchaser agreeing to assume a first mortgage of $70,000, to pay $25,000 in cash, and to give a note secured by second mortgage for the balance.
At a stockholders' meeting held on June 2, 1936, a majority of the stockholders representing" 3,591 shares voted to accept the proposition, while a minority of the stockholders representing 1,125 shares voted against it. The holders of 818 of such minority shares, proceeding in accordance with the provisions of Section 8623-72, General Code, submitted their written objections to the warehouse company within the twenty days specified, and demanded payment of the fair cash value of their shares, placing such value at about $100 per share.
It does not appear that the other stockholders as such were given notice of the objections and demands, or that any meeting of directors or stockholders was called in respect thereto. The only thing done of record was the writing of letters to these minority stockholders, advising them that their demands for payment were unequivocally refused. Such letters bore date of June 26, 1936, and were signed "The Neilston Warehouse Company, by G.W. Bobb, President."
On August 13, 1936, the directors of the warehouse company took official action toward dissolving the corporation, designating The Ohio National Bank of Columbus as liquidating agent. Thereupon the latter took over the cash and other assets to fulfil its functions as liquidator.
No suit was begun by The Neilston Warehouse Company or the demanding minority stockholders to have the fair cash value of the shares of such minority determined within a six-month period, as provided by the sixth unnumbered paragraph of Section 8623-72, General Code.
However, in January, 1937, six of these dissenting stockholders each filed an action in the Court of Common Pleas of Franklin county against The Neilston Warehouse Company and The Ohio National Bank, as liquidator, praying for judgment in an amount equal to the sum originally demanded as the fair cash value of his shares. These suits were based upon the seventh unnumbered paragraph of Section 8623-72, General Code, providing in substance that if no petition is filed by the corporation or the dissenting stockholders within six months for the determination of the fair cash value of the shares of stock of such dissenting stockholders, the value of such shares shall conclusively be deemed to be equal to the amount offered by the corporation, if any such offer was made, or in the absence thereof an amount equal to that initially demanded by the dissenting stockholders.
Answering, the defendants challenged the constitutionality of such unnumbered seventh paragraph as it was sought to be invoked, on the ground that it deprived the majority stockholders of property without due process of law, in violation of Section 1 of the 14th Amendment to the United States Constitution.
The six causes were heard together upon the pleadings and the evidence, and judgments were rendered for the defendants by the trial court. Such judgments were grounded principally upon the determination that the dissenting stockholders having made demands on the corporation for amounts substantially in excess of their fair pro rata share of the assets of the corporation to be distributed, and the majority stockholders as individuals having had no notice of such demands and having been accorded no opportunity to take appropriate action to have the fair cash value determined, the part of Section 8623-72, General Code, creating a "conclusive presumption" that the shares of the dissenters have whatever "fair cash value" they may have demanded, no matter how exorbitant, operated arbitrarily and constituted a denial of due process to the majority stockholders.
A consolidation of the causes was effected and the matter appealed to the Court of Appeals, where the judgment below was reversed by a divided court and the cause remanded for further proceedings.
Mr. O.R. Crawfis and Mr. Carrington T. Marshall, for appellees.
Messrs. Arnold, Wright, Purpus Harlor, Mr. Earl F. Morris and Messrs. Krumm Schwenker, for appellants.
Section 8623-72, General Code, is controlling in this case. It was passed in the interests of minority and dissenting stockholders upon the happening of certain contingencies. The terms of this section, materially affecting the pending case, are that when a majority of stockholders vote to sell the corporate property and assets, the stockholders not voting therefor shall be paid the fair cash value of their shares as of the day before the vote was taken, provided that within twenty days after the vote they object in writing to such sale and make written demand for the payment of the fair cash value of their shares, stating the number and kind of shares held and the amount claimed as the fair cash value thereof.
Within ten days after receiving the demand the corporation shall advise the demanding stockholders in writing whether it will pay the amount asked. Upon refusal, it shall make a written counter proposal.
When the corporation and such dissenting stockholders cannot agree upon a price, either may, within six months after the day the vote was taken, petition the Court of Common Pleas of the county in which the corporation has its principal office to determine the fair cash value of such shares.
If no petition is filed by the corporation or the dissenting stockholders within the six-month period, "the fair cash value of the shares shall conclusively be deemed to be equal to the amount offered to the dissenting shareholder by the corporation if any such offer shall have been made by it as above provided, or in the absence thereof, then an amount equal to that demanded by the dissenting shareholder as above provided." (Italics ours.)
It might be well to observe here that the per share amount demanded by the dissenting stockholders as the fair cash value of their stock is appreciably greater than the per share amount which will be received by other stockholders upon distribution of the amount derived from the disposal of the corporate assets.
The paramount and precise question for decision is whether in the existing circumstances the part of Section 8623-72, General Code, stipulating that the fair cash value of the shares of dissenting stockholders "shall conclusively be deemed to be equal" to the amount demanded by them, has an unconstitutional operation against the majority stockholders, as being violative of the due process section of the 14th Amendment to the federal Constitution.
It is the contention of the defendants that since the statute makes no provision for notice of any kind to the majority stockholders of the demands of the minority and gives them no opportunity to be heard before a competent tribunal in a matter touching their personal interests, the conclusive presumption contained therein as to the value of the shares of the dissenting stockholders, of which the plaintiffs are attempting to take advantage, deprives the majority of their property without due process of law and is therefore unconstitutional in its effect.
Conversely, the plaintiffs and two members of the Court of Appeals take the position that the majority stockholders, having voted to sell the corporate property, thus starting the machinery in motion, should thereafter have kept themselves advised of the steps taken by the minority, and could have "intervened" to protect their interests. Having failed to do so, they have no just cause for complaint as to the "conclusive presumption" of the statute.
The pecuniary and personal interests of two opposing groups of stockholders are primarily involved in a situation like the present one — the majority who voted for the sale of the corporate property, and the minority who did not so vote. After the vote is taken, Section 8623-72, General Code, confines dealings and court proceedings to the corporation on the one hand and dissenting stockholders on the other. Majority stockholders are left entirely out of the equation.
It is well settled that the directors act as the corporation (10 Ohio Jurisprudence, 676, Section 501), and that they are in no sense personal representatives of the stockholders by whose sufferance they hold office. 10 Ohio Jurisprudence, 671, Section 498.
Putting it a little differently, "a stockholder and the corporation of which he is a member, are separate and distinct persons in law, and their interests are always distinct and sometimes adverse." Lawson Covode v. Farmer's Bank of Salem, 1 Ohio St. 206, 211.
Hence, a stockholder of a corporation is not chargeable with actual knowledge of its business affairs or of notices imparted to it, as is a director. 13 American Jurisprudence, 471, Section 419; 10 Ohio Jurisprudence, 343, Section 237.
By voting for the sale of the corporate property, the majority stockholders were not thereby chargeable with notice of the demands of the minority, affecting the individual interests of the former in the distribution of funds, which demands were subsequently transmitted to the corporation. The voting and the later conduct of the minority were separate and distinct matters. Geiger v. American Seeding Machine Co., 124 Ohio St. 222, 177 N.E. 594, 79 A. L. R., 614.
From the record in the instant case it does not appear that any of the majority stockholders, outside of the directors, had knowledge of the demands made on the corporation by the minority, or had knowledge that the president of the corporation on his own initiative had written the letters of June 26, 1936, unqualifiedly refusing such demands and making no counter offer.
But assuming, for the purposes of this discussion, that the majority stockholders did have notice or were chargeable with notice of the minority demands, could they have acted in the assertion of their individual rights and, if so, were they obliged to act? It seems to us the question requires a negative answer. In the first place, the controlling statute does not provide for action on the part of the majority; negotiations and resort to judicial proceedings are limited to the corporation and the minority stockholders who have asserted themselves. In the second place, knowledge cannot be imputed to the majority of the arbitrary stand of the company president, or that no court proceedings were intended to be instituted by the corporation or the minority within six months to establish the fair cash value of the shares, as authorized by the statute. And in the third place, no real detriment occurred to the majority until the expiration of the six-month period, when the conclusive presumption became absolute, through the failure of the corporation or the demanding minority to move.
Essential elements of due process of law are (1) notice, and (2) an opportunity to be heard. 8 Ohio Jurisprudence, 707, Section 591. Therefore, a statute containing a conclusive presumption, or a presumption which operates to deny a vitally affected person fair opportunity to repel it, violates the due process clause of the Constitution. 12 American Jurisprudence, 317, Section 625.
Such is the effect of the pertinent part of Section 8623-72, General Code, in the present case as to the majority stockholders, and it is therefore unconstitutional in its operation. Of course, "the constitutionality of a law may be determined by its operative effect." Castle v. Mason, 91 Ohio St. 296, 110 N.E. 463, Ann, Cas. 1917A, 164.
We do not consider the present holding in conflict with the case of Geiger v. American Seeding, Machine Co., supra ( 124 Ohio St. 222, 177 N.E. 594, 79 A. L. R., 614). Section 8623-72, General Code (112 Ohio Laws, 37), as it applied to such case, provided that a minority shareholder voting against the sale of the corporate assets might object in writing, within twenty days of the vote authorizing the sale, and demand the payment of the fair cash value of his shares.
"In case of disagreement * * * the dissatisfied shareholder may, within six months after such demand is made, but not thereafter, petition the Court of Common Pleas * * * to appoint * * * three appraisers to determine the fair cash value of the shares * * *
It is to be noted that the section as it then read contained no provision as to the corporation fixing and offering a fair cash value, no "conclusive presumption" upon failure to act, and was quite different from its existing form.
In the phase of the Geiger case involving Section 8623-72, General Code (112 Ohio Laws, 37), no constitutional question seems to have been raised, and it was held that the single minority stockholder who followed the procedure outlined by such section was entitled to receive the fair cash value of his stock.
The Geiger case is also distinguishable on its facts. There, in the absence of any controlling statute, a preferred stockholder brought a chancery action to enjoin the corporation from distributing the proceeds derived from the sale of the corporate assets unless and until the preferred stockholders received the par value of their stock plus dividends. Taking the view that the controversy was in fact between the preferred and common stockholders as the real parties in interest, and that the corporation was nothing more than a "stakeholder," the court held that under the circumstances it was not error to permit the individual stockholders to become parties, plead their claims, and prosecute error, especially when the corporation had announced its intention to abide by a lower court decree, which proved satisfactory to neither the preferred nor common stockholders.
In giving the preferred stockholders a partial advantage, the court rested its decision on the contractual significance to be attached to the stock certificates and the articles of incorporation.
Six members of this court are of the opinion that the part of Section 8623-72, General Code, under discussion, has an unconstitutional operation in this case, for the reasons hereinbefore expressed.
Notwithstanding the adverse decision on the constitutional question, plaintiffs contend they are entitled to prevail on two other grounds, viz., estoppel and res judicata.
As to estoppel, the argument is that the corporation and the majority stockholders, having invoked Section 8623-65, General Code, to sell the property, which section refers to and makes Section 8623-72, General Code, a part thereof, will not be permitted to claim the unconstitutionality of any portion of the latter section.
The answer to this is that Section 8623-72 is not made a part of Section 8623-65. In fact, they are separate and distinct and cover different subjects. Section 8623-65 authorizes a corporation to sell its entire assets upon notice to all stockholders and upon a favorable vote at a called meeting, while Section 8623-72 deals entirely with the rights of the dissenting stockholders after the vote, making no provision for the participation by the majority in affairs directly affecting their pecuniary interests.
As to res Judicata, it Appears that some three months after the petition was filed in the pending action and subsequent to the filing of an answer and a number of motions, one of the majority stockholders on her own behalf and on behalf of all other stockholders similarly situated, filed an intervening petition in the cause. Upon motion, the petition was stricken from the files by the trial court and the case proceeded with the original parties. The order entered on the motion pertained to a procedural matter involving only proper parties to the action and cannot be construed as a determination on the merits. And of course the rule is that an order or judgment to operate as res judicata must have been rendered on the merits of the case. 15 Ruling Case Law, 955, Section 431; 34 Corpus Juris, 774, Section 1193; 2 Black on Judgments (2 Ed.), 1043, Section 693; 2 Freeman on Judgments (5 Ed..), 1557, Section 738.
The members of this court concurring in the judgment are of the opinion that neither the doctrine of estoppel nor res judicata has application here.
The judgment of the Court of Appeals is reversed and that of the Court of Common Pleas affirmed.
Judgment reversed.
WEYGANDT, C.J., DAY, WILLIAMS and MATTHIAS, JJ., concur.
I concur in the syllabus but dissent from the judgment on the ground that the defendants, having invoked the powers created by Section 8623-65, General Code, to bring about a sale of the corporate property, are, under authority of New York Central Rd. Co. v. City of Bucyrus, 126 Ohio St. 558, 186 N.E. 450, now estopped to question the constitutionality of that part of Section 8623-72, General Code, which creates a conclusive presumption in favor of minority shareholders. I am also of the opinion that res judicata is not a valid defense.
The importance of the question requires a statement of reasons for disagreement with the majority opinion. A corporation being an artificial entity, its creation and dissolution are necessarily controlled by statutes. Persons acquiring stock in a corporation are charged with notice not only of the charter and by-laws of the corporation but of all statutes governing the corporation including dissolution or sale of the entire property thereof. That being true, the statutes on the particular subject involved become a part of the contract of subscription. The statute in question was enacted primarily for the protection of minority stockholders in the event of sale of the entire property of the corporation. It was enacted in order to prevent abuses that formerly attached to such operations.
It is claimed that part of the statute creating a presumption of value is unconstitutional, that under the facts of the instant case it is a taking of property without due process of law. In order to determine whether there has been due process of law the entire corporate structure must be examined. In the first place stockholders join in the selection of the board of directors which transacts the business of the corporation. Such board thus elected may through unwise management endanger the entire assets of the corporation and yet no one would make the claim that sustaining such loss would be without due process of law. Thus also in respect to the sale of the entire property of a corporation the statutes provide that action must first be taken by the board of directors but no one makes the claim that such action is not due process of law. The next step is submission of the question to all of the stockholders. The result is again controlled by the stockholders. No one claims that such action is the taking of property without due process of law. It is only near the end of the process of sale of the entire property in the instant proceeding that the claim of unconstitutionality is raised.
When the majority stockholders voted upon the question of the sale of the property of the corporation they were charged with notice of the provisions of the statute. They set in operation the statute here involved. In doing so, they take the statute not only with its benefits but also with its infirmities, if any there be. It is not unlike the first step of a contract. Especially so since under Section 8623-72, General Code, a dissenting stockholder may not, without consent of the corporation, withdraw his demand for payment "of such fair cash value," once it is made. If in the light of later events he has demanded too little, he is bound by the procedure even as is the majority. In the instant case a procedure was outlined by the board of directors which the majority stockholders could authorize or not as they saw fit. If the majority stockholders are of the opinion that the procedure is inequitable they have only themselves to blame if they set the machinery in motion. One may not voluntarily initiate a procedure outlined in a statute and thereafter ask to be relieved from the effects of its operation on the claim of the statute's invalidity. Here the dissenting stockholders were not responsible for the situation in which the majority found themselves. Furthermore, the property having been sold, the majority are not in a position to place the dissenting stockholders in statu quo.
The claim is made that under a presumption created by statute property is taken without due process of law. But the presumption becomes operative only upon action by the board of directors ratified by a majority of stockholders. There are many presumptions in the common law that under certain circumstances operate to the advantage of one party or another. That being true can it be said that presumptions to operate under other circumstances may not be created by statute? Indeed, it is universally recognized in our system of jurisprudence that every reasonable presumption will be indulged that a statute is constitutional and that no law will be held invalid unless it clearly contravenes the provisions of the Constitution.
To hold the questioned part of the statute unconstitutional would be to render inoperative and futile the very purpose of the entire statute which was to protect minority stockholders. To hold this part of the statute unconstitutional would be to restore the very abuses by the majority which the statute was intended to prevent.