Utah Hotel Co. v. Madsen

134 P. 577, 43 Utah 285, 1913 Utah LEXIS 71

• Court: Utah Supreme Court
• Decided: June 4, 1913
• Docket: No. 2447
• Status: Published

Opinions

PRICK, J.

This action is based upon the following agreement, which appellant admitted was signed by himself:

“Salt 'Lake City, Utah, April 19, 1909. We, the undersigned, residents of the State of Utah, in consideration of one dollar to each by the other subscribers paid, do hereby subscribe in the proportion hereinafter set opposite our respective names, for the stock of a company to be organized, under the laws of the State of Utah, with a capital stock of fifteen hundred thousand ($1,500,000) dollars, divided into fifteen thousand (15,000) shares of the par value of one hundred ($100) dollars each. The principal place of business to be located in Salt Lake City, Utah. The name of the company to be the Utah Hotel Company. The general purpose of the company will be the erection and ownership of a first class hotel to be built on the northeast intersection of South Temple and Main streets, Salt Lake City, Utah, and such other places as may be provided in the articles of association, which are to be hereafter adopted. The payment on the above subscription shall be payable in sums not to exceed ten per cent of the amount by us subscribed in any one month.”

Respondent, in substance, alleged, proved, and the court found that the appellant and a large number of others had signed the foregoing agreement, and that he had agreed to take fifty shares of the capital stock of the corporation mentioned therein ; that the corporation therein mentioned was duly organized in accordance 'with the ternas and conditions and for the purpose mentioned in said agreement; that calls for the payment of the amounts subscribed for by the several subscribers were duly made in the proportions and within the time specified in said agreement; and that appellant was duly notified of each call as made and of the amount due thereon, but notwithstanding that fact that he had failed and refused to pay the amount he had agreed to pay or any part thereof, and that the whole amount of said subscription was due and payable. The articles or agreement of incorporation was produced in evidence, and it appears upon the face thereof that the laws of this state were duly complied with in organizing the corporation.

The appellant introduced no evidence, and the court made conclusions of law upon the findings aforesaid and entered judgment in favor of respondent for the full amount of the subscription, and he appeals.

1 While appellant has made quite a number of assignments, there is really but one question to be decided, namely: Is the subscription agreement we have set forth above legally enforceable against him? ITis counsel has filed two briefs in which he presents very elaborate arguments to convince us why his client should be relieved from the obligation he has assumed by signing the agreement we have set forth. The first reason given by counsel, as we understand him, is that under our statute (Comp. Laws 1901, sections 314, 315, 316, and 332), in order to enforce a subscription for capital stock of a corporation, the subscribers must sign the articles or agreement of incorporation, or, if a separate agreement is signed, that it must, at least in substance, be incorporated into the articles or agreement of incorporation as a substantive part thereof or the subscriber must in some way have estopped himself from making any defense.

Section 314, sivpra, so far as material, provides that any number of individuals not less than five, at least one of whom must be a resident of tbis state, may become incorporators of a private corporation “for any purpose for which, individuals may lawfully associate.”

Section 315, in substance, provides that in order to organize a corporation “the incorporators shall enter into an agreement in writing, signed by each of them, and sworn to by at least three of their number, as hereinafter provided,” in which agreement they must state the following matters: (1) The name of the corporation; (2) the place where organized; (3) the names of the incorporators and their places of residence; (4) the duration of the corporation, which cannot be more than 100 years; (5) the pursuit or business agreed upon stated in general terms; (6) the principal or general place of business; (Y) “the amount of stock each party (incorporator) has subscribed;” (8) the par value of each share and the limit of capital stock agreed upon; (9) the number and kind of officers, the number of directors, their term of office, and who shall constitute the officers and directors until the first annual meeting is held, etc.; (10) how many of the board directors shall constitute a quorum for the transaction of the corporate business; (11) whether or not the private property of the stockholders shall be liable for the corporate obligations ; and (12) any other additional matters that the incorporators may “deem necessary for conducting the business of the corporation and for its future safety and welfare.”

Section 316 provides that to the foregoing statements “there shall be added the oath or affirmation of three or more of the incorporators, ... to the effect that they have commenced, or it is 'bona, -fide their intention to commence and carry on, the business mentioned in the agreement, and that the affiants verily believe that each party to the agreement has paid or is able to and will pay the amount of the stock subscribed for by him: Provided, that said affidavit shall not be made until at least ten per cent, of the stock subs¿ribed for by each stockholder and not less than ten per cent. of the capital stock of tbe corporation, has been paid in: . . . Provided, further, that where subscriptions to the capital stock of any corporation formed under the provisions of this chapter shall consist, in whole or in part, of property necessary to the pursuit agreed upon, there must appear in the articles of incorporation a description of the property so taken, with a statement of the fair cash value thereof, which statement . . . shall be supplemented by the affidavits of three persons, to the effect that they are acquainted with said property, and that it is reasonably worth the amount in cash for which it was accepted by the corporation.”

Section 332 reads as follows:

“The stockholders of any corporation may regulate the mode of making subscriptions to its capital stock and of calling in the same by by-laws or by express contract.”

What is there in any one or all of these sections that prevents any number of individuals from entering into an agreement whereby they agree among themselves that, in case a certain corporation is organized, each of them will become a stockholder therein and will take and pay for a specified amount of the capital stock to be issued when the corporation is organized? If such an agreement is sufficiently specific in its terms so as to make clear just what the parties agree to do and states the amount of stock that each subscriber agrees to take, why are not the signers to such an agreement bound in case a corporation is organized in accordance with the terms of the agreement and as provided by the latter? Certainly, in the absence of a statute prohibiting it, neither good morals nor sound public policy does so. Indeed, both public policy and good morals would require its enforcement. The statute is very clear that, in case it is proposed to organize a corporation with a large number of stockholders, it is only necessary that the names of five incorporators be inserted in the articles of incorporation, together with the amount of the capital stock that each of them agrees to take, and that those five and no more need to sign the articles. It is true that the incorporators must set forth the amount of the capital stock agreed upon and the number of shares into which, it is divided and the par value of each share; but the statute does not require, nor would it always be practical, to either state the names of all the prospective stockholders nor the exact amount of stock that each one will ultimately take. Besides, section 332 in express terms confers power upon the stockholders to “regulate the mode (manner) of making subscriptions to its capital stock and calling in the same by by-laws or by express contract.” Since it may be done by express contract shows that it was intended that a contract to that effect may be entered into even before the corporation is organized, and the contract agreement is enforced if a corporation is in fact organized. It would hardly be necessary to enter into a contract after organization where the thing could be reached by regulation or by by-laws, but a contract would be necessary if it were attempted to be done before organization.

2 But counsel contend that section 316 provides that “at least ten per cent, of the stock subscribed by each stockholder” must be paid in before the corporation is authorized to commence business. From this counsel argues that, because appellant did not pay in ten per cent, of the amount subscribed by him, therefore he did not become a stockholder, and if he did not become a stockholder he is not bound. We think that there are two answers to this contention:

(1) If it were assumed that, where the whole subscription is to be represented by cash, each subscriber must pay ten per cent, of his subscription before the corporation is authorized to commence business, yet we have no such case here. In the case at bar more than the amount required by statute to be paid in before commencing business was in fact paid in by the conveyance of property to the corporation in the manner provided by the statute- There can be no doubt that under the statute one stockholder may deliver or convey to the corporation property, the value of which is equal to the entire par value of the whole capital stock agreed upon, while such stockholder perhaps may only subscribe for one-tenth or even much less of the whole capital stock. The capital stock of tbe corporation is thus paid up in full, and all of the terms imposed in that regard by the state, which, in contemplation of law, is a party to the articles of incorporation, are satisfied. In such cases the individual stockholder, therefore, may pay his cash subscription to the corporation, but the sum is turned over to the one who conveyed the property and in payment therefor. In view, therefore, that in this case a large share of the capital stock was paid in property, we need not determine the question of whether, under different conditions, the individual stockholder should actually pay 10 per cent, of his subscription before commencing business or not.

(2) In our opinion it is clear that the condition imposed by the statute is not intended,for the benefit of the subscriber but is for the protection of the creditors of the corporation. If this provision were construed to be for the benefit of the subscriber, he could defeat the organization of the corporation, although he had signed the articles of incorporation, and could thus take advantage of his own wrong. We think that a subscriber for corporate stock cannot avail himself of such a defense. These are matters that the state may enforce. Whether a subscriber may take advantage of the delinquencies of other subscribers, who are permitted to remain delinquent with the consent of the corporation, we need not now determine, since there is no such claim presented here. It is true that, if the statute specifically prescribes the manner of making subscriptions for capital stock, then, in order to bind the subscriber, the terms of the statute must ordinarily be complied with or the subscription will not be enforceable. . This is precisely what counsel claims, and he further insists that such is the effect of our statute. We have set forth all of the provisions of the statute which are relied on by counsel, and, if his contention in that regard fails, he must necessarily fail in his defense. The duty and responsibility of interpreting the statute rests upon us. We cannot divide such responsibility or duty with any one. In our judgment counsel’s contentions, for the reasons stated, and for others which we need not elaborate, are clearly untenable.

3 It cannot successfully be contended that in organizing the corporation in question the terms of the agreement signed by appellant were departed from, or that its terms are not enforceable because of uncertainty. Neither can it be said that any statutory requirement has either been ignored or violated. It follows, therefore, that whether the agreement in question is enforceable or not must be determined from the general law upon the subject. While there is more or less diversity of'opinion among the courts upon the subject, considerable of that diversity no doubt arises from the interpretation and application of local statutes. It is not necessary to review the numerous cases upon the subject here. It is sufficiently done by the text-writers. In 10 Oyc. 380, the general rule is stated thus:

“As a general rule, applicable to all American schemes of incorporation, although not always assented to by the courts, whoever subscribes to an unconditional agreement to take a given number of shares becomes thereby a shareholder in the corporation in respect to that number, subject to any valid conditions named in the subscription paper and to those imposed by the general law. The act of subscribing for a stated number of shares fixes the liability of the subscriber to creditors of the corporation as a shareholder, although he has not paid into the treasury of the corporation any part of his subscription, or done any act whatever in his character as a shareholder.”

The rule is also clearly stated in 1 Thompson on Corporations, section 513, in the following words:

“The effect of agreements to form corporations, and the rights and liabilities of the subscribers to preliminary agreements, with the authorities supporting the same, are given by Mr. Lawson as follows: ‘Where a number of persons mutually agree to become shareholders, and form a corporation to be afterwards incorporated, the obtaining of the charter makes them stockholders. A stock subscription made in contemplation of a charter to construct a railroad is a valid contract and can be enforced. A subscription to stock of a company for building a hotel, made before the creation of the company, was held to take effect as an agreement on its acceptance by the company when organized and to bind the sub-seribers to take tbe shares and pay therefor as the board of directors might require, even before the building of the hotel. Each subscription to a common fund for a common purpose is a contract by each associate with his fellows in consideration of similar contracts by them who contribute to the common fund; the amount subscribed, and, when the full sum is subscribed and the association organized, raises a duty and liability on the part of each subscriber to pay the amount subscribed. . . ”

In 1 Purdy’s Beacb Corp. section 205, tbe rule is stated in tbe following words:

“A subscription by a number of persons to the stock of a corporation to be thereafter formed by them has in law a double-character: First. It is a contract between the subscribers themselves to become stockholders without further act on their part, immediately upon the formation of the corporation. As such a. contract it is binding and irrevocable from the date of the subscription (at least in the absence of fraud or mistake), unless-canceled by consent of all the subscribers before acceptance by the corporation. Second. It is also in the nature of a continuing offer to the proposed corporation, which, upon acceptance by it after its formation, becomes as to each subscriber a contract between him and the corporation.”

Tbe rule is also stated and fully discussed in Cook on Corporations. (6tb Ed.) sections 71, 72, and 75. In tbe latter section Professor Collins’ rules relating to tbe subject are given in full.

Counsel for appellant does not dispute tbe general rule but insists tbat it bas no application in tbis state because of wbat is contained in our statute; but, inasmuch as counsel’s views witb regard to tbe meaning of our statute cannot prevail, bis contentions cannot be- sustained. We are clearly of tbe opinion tbat there is nothing contained in our statute which in any way affects or modifies tbe application of the-general rules which we have quoted above. While counsel cites numerous cases, be witb commendable frankness concedes tbat witb very few exceptions these eases sustain bis-views only in case we agree witb him in tbe construction he places upon tbe statute in question. We have carefully examined all of tbe cases cited by counsel, and we are clearly of tbe opinion tbat none cited is controlling herein.

4 But counsel also contends that, inasmuch as there were less than $1,500,000 subscribed, therefore the amount subscribed for by his client is not enforceable. It is contended in this regard that it is implied from what is said in the agreement of subscription that the full amount of the authorized capital stock stated therein should have been subscribed before the agreement became effective. Under the statute, as we have seen, a corporation may be organized and may commence business as soon as a certain amount of the capital stock is subscribed for and paid in. There are no terms in the agreement sued on which in •any way are contrary to the statute, and we must assume, therefore, that the parties entered into the agreement in pursuance of the general law upon the subject. We cannot impose conditions other than those stated in the agreement or such as are necessarily implied by law. The corporation was organized strictly in accordance with both the terms of the agreement and the statute. Counsel’s contention must therefore fail.

_It is further insisted that there is neither evidence nor finding that the other parties to the agreement relied upon appellant’s promise. If the fulfillment' of the terms of the agreement does not show a reliance upon the mutual promise of all signers, we cannot conceive how a reliance can be shown.

5 It is contended that not all who signed the agreement sued on signed the articles of incorporation. The fact is that all who agreed to subscribe for stock did sign the articles of incorporation except the appellant, and he refused to do so. Under the circumstances, his refusal ■cannot aid him. Nor is the contention tenable that the appellant did not stand upon an equal footing with the other subscribers, since he took no part in choosing the first board of directors. If appellant failed to take part in the organization of the corporation, it was his own fault, of which lie cannot now complain.

6 Lastly, it is contended that by virtue of article 12, section 5, of the Constitution of this state, the agreement in question is not enforceable because it is there provided that corporations shall “not issue stock except to bona fide subscribers thereof,” and that appellant is not a subscriber, and therefore stock cannot legally be issued to him.

7 We have held that appellant is a bona fide subscriber, and therefore the whole contention falls. But that provision was not intended to have application to conditions like those involved here. That provision deals with a fictitious issue of stock and does not deal with the question of when a subscriber may be held to a compliance with his agreement to take stock. All that was agreed to by the parties to the agreement in question was that each one would contribute a certain amount of the capital stock of a certain corporation which was to be organized for a certain purpose at a specified place and for a specific amount of capital stock agreed upon. This agreement became effective and enforceable against each signer when its conditions were complied with. This was done when the corporation was organized, as provided in the agreement and in accordance with our statute. Immediately after its organization the corporation could call for the amount of the subscription as provided in the agreement, and, in case any subscriber refused to pay his proportion, the corporation could compel payment in a court of law. It could have sued for each installment as it became due, but the mere fact that it delayed action until after the whole subscription was called for and became payable does not affect its rights.

The judgment is affirmed, with costs to respondent.

McCARTY, C. J., and' STRAUB, J., concur.