SLOAN, J.
In early 1963 defendants Campbell, Winn and Riddlesbarger, as the majority stockholders and directors of defendant C & C Plywood Corp., successfully culminated a plan to increase the capital stock of the defendant corporation. The recapitalization of the corporation virtually eliminated plaintiffs’ previously owned 32 percent of the outstanding stock. Plaintiffs, alleging that defendants’ acts were illegal, fraudulent and oppressive,① filed this suit, seeking to be restored to their 32 percent interest in the corporation. The trial court dismissed plaintiffs’ suit and they appeal. Although plaintiffs owned the stock as partners and present their claim as a unit, plaintiff Browning was the active participant in the affairs of the corporation, so for the purposes of this opinion we will refer to him as the active plaintiff.
C & C Plywood Corp., was originally organized in 1959. Its purpose was to develop a site in Kalispell, Montana, into a plywood mill. Defendant Campbell was the organizer and financier of the corporation. [576] Browning was the finder. His job had been to locate the site for a plywood mill and its supporting timber resources and to participate in the construction of the mill. For this he was awarded 32 percent of the stock in the corporation. Defendants Winn and Riddlesbarger were the trustees of two trusts that Campbell had caused to be established at some previous time for the ostensible benefit of his two daughters. From the inception of the corporation the two trustees were the owners of a majority of the stock. The trustees also loaned the corporation large sums of money from the trust estates. The trustees acted in concert with Campbell, if not at his command. Defendant Thomason was the only other stockholder. He acted in concert with the directors.
When the corporation was first organized it had authorized capital stock of 1,000 shares of no par value stock. Each of the two trusts became the owner of 250 shares of this stock, Campbell acquired 20 shares, Thomason had 160 and Browning became the owner of 320 shares.
There was considerable evidence at the trial relative to Browning’s alleged failure to participate in the construction of the mill. This evidence, by both sides, was apparently aimed at proving whether or not Browning did perform the contract by which he became entitled to the 32 percent interest in the corporation. For our purposes we view that evidence as irrelevant. This was not a suit to decide that question. The significant fact is that when the recapitalization took place, Browning was recognized as the owner of 32 percent of the stock. The question in this case, as stated in defendants’ brief is: “Whether the defendants committed any wrong or breached any duty to [577] the plaintiffs in the increase of the capitalization of C & C Plywood Corp.f’
To explain the increase of the stock it is necessary to mention that the corporation began operation of the mill in February 1960. It operated at a loss until sometime after its fiscal year which ended on July 31, 1962. The annual report of the financial status of the corporation at that date showed an operating deficit of more than $200,000. The corporation was then indebted to the two trusts for almost one-half million dollars. The debt was secured by mortgages on the corporation’s physical assets. By the end of the fiscal year ending July 31, 1963, the corporation had a profit. At what time in the fiscal year it could have been foreseen that the corporation was emerging into profitable operation is not found in the record. It is possible to infer that sometime during that fiscal year the defendant-directors could have known that the organizational and operational problems of the corporation’s business had been resolved and that future profitable operation could have been anticipated.
In any event, the individual defendants caused a special meeting of the stockholders to be called for October 29, 1962. Browning received notice of the meeting but did not attend. At the October 29th meeting the stockholders approved a resolution to increase the number of shares of the corporation from 1,000 to 500,000 shares. Thereafter, the directors proceeded to take the action necessary to accomplish this purpose. On December 14, 1962, the corporation issued a pre-emptive Stock Allotment Certificate to Browning and, presumably, the other stockholders. This certificate informed Browning that he was qnabfip.fi to subscribe to 151,696 shares of the newly authorized stock at one dollar per share. The certificate informed [578] Browning that “Unless the certificate is surrendered at [the corporation office] of the Secretary-Treasurer on or before January 17, 1963, accompanied by payment in full, the rights will be void and this certificate of no value or effect.” The defendant-directors knew that it was financially impossible for Browning to exercise this pre-emptive right, either in full or for any substantial part of it. It was, and was intended to be, an eviction notice.
It makes no difference whether or not the certificate of pre-emptive notice directed to Browning did lawfully compel him to subscribe and pay for the full 150,000 shares or none, although Browning considered that this was the effect of the certificate. It is important in assessing the evidence, because it did require Browning to expend a substantial sum to retain any meaningful proportionate interest in the corporation. It is also important because the offer contained in the certificate was considered by the defendants as the only chance Browning could have to preserve his proportionate interest. It is apparent from the record that this was the purpose of the notice and that it accomplished its purpose. Since defendants well knew that Browning could not exercise his pre-emptive right, or any appreciable part of it, it is clear that defendants had no intention of exercising the pre-emptive rights they were entitled to, and they did not do so. They had another plan.
The plan was consummated at a special meeting of the Board of Directors held on February 11, 1963, immediately following the expiration of the pre-emptive right period; the design to eliminate Browning was completed. At that meeting the defendant-directors authorized all of defendant stockholders a right to subscribe for any amount of the new stock at one [579] dollar per share. Browning was given no notice of this meeting nor of the opportunity thus afforded the other stockholders. The freeze-out was completed on February 17, 1963, at which time each of the two trusts was issued 10,454 shares. This was paid for by reducing the debt of the corporation② to the trustees in this comparatively small amount. This is to be contrasted with 125,000 shares each trust was given a pre-emptive right to buy. Campbell was issued 32 shares, and later defendant Thomason was issued 10,240 shares. As a consequence, Browning’s interest in the corporation was reduced from 32 percent to one percent. He was not, of course, given any opportunity to subscribe for the drastically reduced amount of stock that would have retained his proportionate share.
Free access — add to your briefcase to read the full text and ask questions with AI
SLOAN, J.
In early 1963 defendants Campbell, Winn and Riddlesbarger, as the majority stockholders and directors of defendant C & C Plywood Corp., successfully culminated a plan to increase the capital stock of the defendant corporation. The recapitalization of the corporation virtually eliminated plaintiffs’ previously owned 32 percent of the outstanding stock. Plaintiffs, alleging that defendants’ acts were illegal, fraudulent and oppressive,① filed this suit, seeking to be restored to their 32 percent interest in the corporation. The trial court dismissed plaintiffs’ suit and they appeal. Although plaintiffs owned the stock as partners and present their claim as a unit, plaintiff Browning was the active participant in the affairs of the corporation, so for the purposes of this opinion we will refer to him as the active plaintiff.
C & C Plywood Corp., was originally organized in 1959. Its purpose was to develop a site in Kalispell, Montana, into a plywood mill. Defendant Campbell was the organizer and financier of the corporation. [576] Browning was the finder. His job had been to locate the site for a plywood mill and its supporting timber resources and to participate in the construction of the mill. For this he was awarded 32 percent of the stock in the corporation. Defendants Winn and Riddlesbarger were the trustees of two trusts that Campbell had caused to be established at some previous time for the ostensible benefit of his two daughters. From the inception of the corporation the two trustees were the owners of a majority of the stock. The trustees also loaned the corporation large sums of money from the trust estates. The trustees acted in concert with Campbell, if not at his command. Defendant Thomason was the only other stockholder. He acted in concert with the directors.
When the corporation was first organized it had authorized capital stock of 1,000 shares of no par value stock. Each of the two trusts became the owner of 250 shares of this stock, Campbell acquired 20 shares, Thomason had 160 and Browning became the owner of 320 shares.
There was considerable evidence at the trial relative to Browning’s alleged failure to participate in the construction of the mill. This evidence, by both sides, was apparently aimed at proving whether or not Browning did perform the contract by which he became entitled to the 32 percent interest in the corporation. For our purposes we view that evidence as irrelevant. This was not a suit to decide that question. The significant fact is that when the recapitalization took place, Browning was recognized as the owner of 32 percent of the stock. The question in this case, as stated in defendants’ brief is: “Whether the defendants committed any wrong or breached any duty to [577] the plaintiffs in the increase of the capitalization of C & C Plywood Corp.f’
To explain the increase of the stock it is necessary to mention that the corporation began operation of the mill in February 1960. It operated at a loss until sometime after its fiscal year which ended on July 31, 1962. The annual report of the financial status of the corporation at that date showed an operating deficit of more than $200,000. The corporation was then indebted to the two trusts for almost one-half million dollars. The debt was secured by mortgages on the corporation’s physical assets. By the end of the fiscal year ending July 31, 1963, the corporation had a profit. At what time in the fiscal year it could have been foreseen that the corporation was emerging into profitable operation is not found in the record. It is possible to infer that sometime during that fiscal year the defendant-directors could have known that the organizational and operational problems of the corporation’s business had been resolved and that future profitable operation could have been anticipated.
In any event, the individual defendants caused a special meeting of the stockholders to be called for October 29, 1962. Browning received notice of the meeting but did not attend. At the October 29th meeting the stockholders approved a resolution to increase the number of shares of the corporation from 1,000 to 500,000 shares. Thereafter, the directors proceeded to take the action necessary to accomplish this purpose. On December 14, 1962, the corporation issued a pre-emptive Stock Allotment Certificate to Browning and, presumably, the other stockholders. This certificate informed Browning that he was qnabfip.fi to subscribe to 151,696 shares of the newly authorized stock at one dollar per share. The certificate informed [578] Browning that “Unless the certificate is surrendered at [the corporation office] of the Secretary-Treasurer on or before January 17, 1963, accompanied by payment in full, the rights will be void and this certificate of no value or effect.” The defendant-directors knew that it was financially impossible for Browning to exercise this pre-emptive right, either in full or for any substantial part of it. It was, and was intended to be, an eviction notice.
It makes no difference whether or not the certificate of pre-emptive notice directed to Browning did lawfully compel him to subscribe and pay for the full 150,000 shares or none, although Browning considered that this was the effect of the certificate. It is important in assessing the evidence, because it did require Browning to expend a substantial sum to retain any meaningful proportionate interest in the corporation. It is also important because the offer contained in the certificate was considered by the defendants as the only chance Browning could have to preserve his proportionate interest. It is apparent from the record that this was the purpose of the notice and that it accomplished its purpose. Since defendants well knew that Browning could not exercise his pre-emptive right, or any appreciable part of it, it is clear that defendants had no intention of exercising the pre-emptive rights they were entitled to, and they did not do so. They had another plan.
The plan was consummated at a special meeting of the Board of Directors held on February 11, 1963, immediately following the expiration of the pre-emptive right period; the design to eliminate Browning was completed. At that meeting the defendant-directors authorized all of defendant stockholders a right to subscribe for any amount of the new stock at one [579] dollar per share. Browning was given no notice of this meeting nor of the opportunity thus afforded the other stockholders. The freeze-out was completed on February 17, 1963, at which time each of the two trusts was issued 10,454 shares. This was paid for by reducing the debt of the corporation② to the trustees in this comparatively small amount. This is to be contrasted with 125,000 shares each trust was given a pre-emptive right to buy. Campbell was issued 32 shares, and later defendant Thomason was issued 10,240 shares. As a consequence, Browning’s interest in the corporation was reduced from 32 percent to one percent. He was not, of course, given any opportunity to subscribe for the drastically reduced amount of stock that would have retained his proportionate share.
The minutes of the February 11th special meeting of the directors reveal statements intended to justify this subrosa transaction. It was stated that it was necessary to permit the trustees to have a greater participation in the profits and to permit cancellation of overdue corporation notes due them as trustees. It was also recorded in the minutes that both Campbell and Thomason had worked diligently for the corporation and should be entitled to enhance their holdings on such “reasonable terms as the officers in their discretion might determine.” Thomason was permitted to exchange a claim for unpaid salary for his shares. Browning should have been given the same opportunity. He, too, had an unpaid salary claim which, even though disputed, obviously had some value.
Defendants testified at the trial that the need for [580] the additional paper capitalization was to enable them to permit public sale of the stock; to provide a better ratio between capitalization and debt; and to enable Browning to financially participate in the corporation. The difficulty with accepting these explanations, both in the minutes of the February 11th meeting and in the testimony, is that none of them were accomplished, or even attempted.
There is no evidence to indicate the slightest attempt to make the stock available to the public. The large debt of the corporation was not materially reduced. The ratio of debt to the paid-in capital stock was only nominally changed. Browning was prevented from additional financial participation in the corporation by the limitation on persons permitted to buy at the special sale of February 11, and defendants did not attempt to explain how the increase of the stock authorized at the February 11th meeting accomplished any of the business purposes they claimed for the entire transaction. The only tangible result of the increase of the stock and the amount issued was the elimination of Browning’s 32 percent interest in the corporation.
There is other evidence which supports the conclusion that this was the defendants’ purpose. Some of the witnesses testified that one or more of the defendants had stated to the witnesses that this was the intended purpose. The minutes of the meetings of the directors of the corporation, held before the increase in capital stock was proposed, show that defendant Campbell desired to eliminate plaintiff as a stockholder by simply denying that he had any stock. The latter evidence emphasizes without contradiction that Campbell wanted to oust Browning as a stock[581] holder. It may have been that there was some reason for defendants to have believed that Browning had breached the agreement which entitled him to 320 shares of the original stock. But defendants did not see fit to attempt to eliminate his stock by any action to establish their right to cancel the stock. Instead, they proceeded by the method described. The amount of the increase of the stock from 1,000 shares to 500,000 in contrast to the small portion that was issued with no addition to the capital of the corporation is, of itself, evidence of the purpose.
No oases have been cited or found which are directly comparable to the precise problem presented by this case. Most of the eases concern the right of a minority stockholder to enjoin the issuance of additional stock. See Annotation, 38 ALR2d 1366 (1954). These cases are not particularly helpful to the instant problem. O’Neal & Derwin, Expulsion or Oppression of Business Associates, “Squeeze-Outs in Small Enterprises,” (1961), passim, and beginning particularly at page 91, as the title implies, provides the best analysis of the few cases that are relevant to the question at hand. The authors examine the reluctance of the courts to interfere in intra-corporate disputes but also find that courts have given relief when the purpose of the increased stock issue is only for the benefit of the majority and serves no corporate purpose. In the instant case the only demonstrable purpose served by the increase of stock was to provide the tools with which to drastically reduce the interest of Browning in the corporation. We are convinced by the evidence that this was done to eliminate Browning as a stockholder and that this purpose was wrongful and oppressive.
[582] Defendants have argued that Browning was not entitled to relief because he failed to exercise any of his rights as a stockholder to obtain intra-corporate relief. The only thing suggested by defendants that he could have done was to protest. It is obvious that any protest would have been unavailing.
The relief to which Browning is entitled presents a difficult problem. He prayed for the appointment of a receiver for the corporation and for its dissolution to award him a 32 percent interest in the proceeds of the dissolution as permitted by ORS 57.595, quoted supra. This is an untenable request. But this is not the only remedy available to the court. The most obvious relief would be to cancel the stock increase and restore the stockholders to- their former proportionate status. This may not be appropriate because some of the defendants appear to have pledged their stock to other persons who are not parties to this proceeding. And, the defendants did give consideration for the additional stock issued to them. However, the evidence is not sufficient to enable us to determine what the precise relief should be. The trial court should take such additional evidence as may be necessary to determine the appropriate relief. It appears to us that if a return to the prior status quo is not feasible, then that plaintiff should have damages or be entitled to buy sufficient stock at $1 per share to enable him to retain his 32 percent interest in the corporation, and, if the court should find this to be the appropriate relief, then Browning is entitled, like defendant Thomason, to apply in payment of the stock, such amount, if any, as the court may find that the corporation owes to Browning for unpaid salary.
Beversed.