Stacy, J.
It appears from the facts found by his Honor and embodied in the judgment of the Superior Court, that prior to the year 1906, the people of Statesville and Iredell County enjoyed the benefits of a locally owned, independent, telephone system. The Southern Bell Telephone Company had repeatedly made application to the board of aldermen of the city of Statesville for a franchise to establish its system in said community, but this request had been consistently denied. Whereupon, in 1906, the Southern Bell Telephone Company, without notice to the board of aldermen or the citizens of Statesville, bought out the independent system and undertook to control and to monopolize the telephone business at rates greatly in excess of those formerly charged in said locality. In order to rid the community of this situation, and for the purpose of establishing and maintaining a local independent telephone system, the Iredell Telephone Company, defendant herein, was organized by a number of interested citizens who lived in the city of Statesville. For reasons which seemed compelling to the incorporators, and which they deemed necessary to safeguard the interests of stock-
Folders in tbe defendant company, there was embraced in the certificate of incorporation the following limitation on the sale and transfer of stock:
“Shares of stock in this corporation shall not be transferred or sold until said sale or transfer shall have been reported to the directors and approved by them.”
The charter was duly approved and issued by the Secretary of State, accepted by the corporators, and the certificate of stock, issued to each stockholder, contained a statement on the face of said stock that it could not “be sold or transferred until reported to, and approved by, the board of directors, and then only transferable on the books of the corporation by the holder thereof in person or by attorney,” etc.
The plaintiff, a resident of Durham, has in his possession 116 shares of stock of the defendant corporation which in August, 1917, he demanded that the directors transfer to him. . The directors met, and after carefully considering plaintiff’s demand, and acting in good faith, declined to approve the sale and transfer of said stock, and made the following order in reference thereto, which was communicated to the plaintiff:
“This board, after duly considering the matter, disapproved the sale of said stock to Mr. Wright, but approves of the sale of said stock by said stockholder, at the price offered to the agents of Mr. Wright, and have secured purchasers therefor who are local citizens and stockholders of the Iredell Telephone Company and in sympathy with the independent business and engaged in building up the Iredell Telephone Company as an independent telephone company, and are ready, upon delivery of said stock, properly endorsed, to pay therefor in cash.”
The plaintiff contends that the aforesaid restrictions and powers granted defendant in its charter, and set out in its certificates of stock, are against public policy, and therefore void. On the other hand, the defendant contends that said provisions are just, proper and reasonable limitations on the sale and transfer of its stock, and that the action of its directors, in refusing to transfer the 116 shares to the plaintiff, but approving said sales at the price offered by his agents, and securing purchasers therefor, who were in sympathy with the objects and purposes of the defendant, was within the rights granted to the defendant and did not, and does not, constitute any unreasonable restraint upon the power of alienation.
We have found no statute in the laws of this State forbidding restrictions and limitations in the sale and transfer of stock in corporations. And it would seem that where the Legislature, in the exercise of its constitutional grant, or reservation (Art. VII, sec. 1, Const.), has authorized
tbe Secretary of State to issue certificates of incorporation and approve the application for charters, the provisions of such charters, not inconsistent with the legislative policy and so approved by the Secretary of State have, at least the force and effect of a valid agreement and binding as between the stockholders who take with notice of such provisions.
Dempster Mfg. Co. v. Downs,
126 Iowa, 80; 3 Amer. Cas., 187, and note. As bearing somewhat ujron this |>oint see, also,
White v. Kincaid,
149 N. C., 415.
In the case of
Longyear v. Hardman,
219 Mass., 405,
Rugg, C. J.,
in an opinion of great force and clearness, states this position as follows :
“The absence of any definite limitation upon the power of the incorpo-rators to impose restrictions must be taken to be a legislative determination that considerable latitude was intended. No such restrictions can be declared to be unlawful under these circumstances unless palpably unreasonable. A corporation bears some resemblance to a partnership. Plainly no new partner can be introduced into a partnership without the assent of all the partners. Said
Chief Justice Holmes in Barrett v. King,
181 Mass., 476, at p. 479, when discussing a somewhat similar proposition: ‘Stock in a corporation is not merely property. It also creates a personal relation analogous otherwise than technically to a partnership. . . . There seems to be no greater objection to retaining the right of choosing one’s associates in a' corporation than in a firm.’ The motives for the retention of such right in a small business corporation, where substantial changes in ownership of stock well might be accompanied by a change of managing officers, are obvious. Subscriptions of stock sufficient to organize the corporation with adequate capital might be difficult to obtain unless permanency of management were secured in some way against possible changes arising from mutations in the ownership of a bare majority of the stock. Elements of importance both to the subscribers of capital stock and to the executive officers might render some such restriction a valuable security to the investment of money and to the personal devotion of individuals in building up the business. The characteristics of associated stockholders may be important. Harmony of purpose and of business methods and ideals among stockholders may be a significant element in success. The insertion of the restriction upon the right of transfer of the shares of stock in the agreement of association, the initial act in the organization of the company upon which depends all that comes after, is a limitation upon the corporation. It becomes a part of its being and enters into each share of stock as a part of its essence. The corporation comes into existence with this inherent qualifying restraint. It is agreed by all
tbe original incorporators wbo in respect of determining tbe nature of tbe corporation speak for future stockholders. It must be- approved by tbe commissioner of corporations as representative of tbe commonwealth before tbe charter can issue. A copy of it is a public record in tbe office of tbe secretary of tbe commonwealth, where it may be read by all who contemplate becoming stockholders. . . . Tbe owners of stock in a corporation thus organized cannot complain of such a congenital characteristic. Each stockholder takes bis stock subject to this restraining condition. . . .
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Stacy, J.
It appears from the facts found by his Honor and embodied in the judgment of the Superior Court, that prior to the year 1906, the people of Statesville and Iredell County enjoyed the benefits of a locally owned, independent, telephone system. The Southern Bell Telephone Company had repeatedly made application to the board of aldermen of the city of Statesville for a franchise to establish its system in said community, but this request had been consistently denied. Whereupon, in 1906, the Southern Bell Telephone Company, without notice to the board of aldermen or the citizens of Statesville, bought out the independent system and undertook to control and to monopolize the telephone business at rates greatly in excess of those formerly charged in said locality. In order to rid the community of this situation, and for the purpose of establishing and maintaining a local independent telephone system, the Iredell Telephone Company, defendant herein, was organized by a number of interested citizens who lived in the city of Statesville. For reasons which seemed compelling to the incorporators, and which they deemed necessary to safeguard the interests of stock-
Folders in tbe defendant company, there was embraced in the certificate of incorporation the following limitation on the sale and transfer of stock:
“Shares of stock in this corporation shall not be transferred or sold until said sale or transfer shall have been reported to the directors and approved by them.”
The charter was duly approved and issued by the Secretary of State, accepted by the corporators, and the certificate of stock, issued to each stockholder, contained a statement on the face of said stock that it could not “be sold or transferred until reported to, and approved by, the board of directors, and then only transferable on the books of the corporation by the holder thereof in person or by attorney,” etc.
The plaintiff, a resident of Durham, has in his possession 116 shares of stock of the defendant corporation which in August, 1917, he demanded that the directors transfer to him. . The directors met, and after carefully considering plaintiff’s demand, and acting in good faith, declined to approve the sale and transfer of said stock, and made the following order in reference thereto, which was communicated to the plaintiff:
“This board, after duly considering the matter, disapproved the sale of said stock to Mr. Wright, but approves of the sale of said stock by said stockholder, at the price offered to the agents of Mr. Wright, and have secured purchasers therefor who are local citizens and stockholders of the Iredell Telephone Company and in sympathy with the independent business and engaged in building up the Iredell Telephone Company as an independent telephone company, and are ready, upon delivery of said stock, properly endorsed, to pay therefor in cash.”
The plaintiff contends that the aforesaid restrictions and powers granted defendant in its charter, and set out in its certificates of stock, are against public policy, and therefore void. On the other hand, the defendant contends that said provisions are just, proper and reasonable limitations on the sale and transfer of its stock, and that the action of its directors, in refusing to transfer the 116 shares to the plaintiff, but approving said sales at the price offered by his agents, and securing purchasers therefor, who were in sympathy with the objects and purposes of the defendant, was within the rights granted to the defendant and did not, and does not, constitute any unreasonable restraint upon the power of alienation.
We have found no statute in the laws of this State forbidding restrictions and limitations in the sale and transfer of stock in corporations. And it would seem that where the Legislature, in the exercise of its constitutional grant, or reservation (Art. VII, sec. 1, Const.), has authorized
tbe Secretary of State to issue certificates of incorporation and approve the application for charters, the provisions of such charters, not inconsistent with the legislative policy and so approved by the Secretary of State have, at least the force and effect of a valid agreement and binding as between the stockholders who take with notice of such provisions.
Dempster Mfg. Co. v. Downs,
126 Iowa, 80; 3 Amer. Cas., 187, and note. As bearing somewhat ujron this |>oint see, also,
White v. Kincaid,
149 N. C., 415.
In the case of
Longyear v. Hardman,
219 Mass., 405,
Rugg, C. J.,
in an opinion of great force and clearness, states this position as follows :
“The absence of any definite limitation upon the power of the incorpo-rators to impose restrictions must be taken to be a legislative determination that considerable latitude was intended. No such restrictions can be declared to be unlawful under these circumstances unless palpably unreasonable. A corporation bears some resemblance to a partnership. Plainly no new partner can be introduced into a partnership without the assent of all the partners. Said
Chief Justice Holmes in Barrett v. King,
181 Mass., 476, at p. 479, when discussing a somewhat similar proposition: ‘Stock in a corporation is not merely property. It also creates a personal relation analogous otherwise than technically to a partnership. . . . There seems to be no greater objection to retaining the right of choosing one’s associates in a' corporation than in a firm.’ The motives for the retention of such right in a small business corporation, where substantial changes in ownership of stock well might be accompanied by a change of managing officers, are obvious. Subscriptions of stock sufficient to organize the corporation with adequate capital might be difficult to obtain unless permanency of management were secured in some way against possible changes arising from mutations in the ownership of a bare majority of the stock. Elements of importance both to the subscribers of capital stock and to the executive officers might render some such restriction a valuable security to the investment of money and to the personal devotion of individuals in building up the business. The characteristics of associated stockholders may be important. Harmony of purpose and of business methods and ideals among stockholders may be a significant element in success. The insertion of the restriction upon the right of transfer of the shares of stock in the agreement of association, the initial act in the organization of the company upon which depends all that comes after, is a limitation upon the corporation. It becomes a part of its being and enters into each share of stock as a part of its essence. The corporation comes into existence with this inherent qualifying restraint. It is agreed by all
tbe original incorporators wbo in respect of determining tbe nature of tbe corporation speak for future stockholders. It must be- approved by tbe commissioner of corporations as representative of tbe commonwealth before tbe charter can issue. A copy of it is a public record in tbe office of tbe secretary of tbe commonwealth, where it may be read by all who contemplate becoming stockholders. . . . Tbe owners of stock in a corporation thus organized cannot complain of such a congenital characteristic. Each stockholder takes bis stock subject to this restraining condition. . . . That there is nothing inherently unconscionable in such a limitation upon tbe right of transfer is manifest from tbe very broad power exercised by organizers of companies under tbe English acts and in some of our states.”
Mr. Thompson, in bis work on Corporations (2 ed.), vol. 4, sec. 4135, states tbe general law as follows:
“Tbe rule is well settled that a provision in tbe charter or articles of incorporation that no stockholder shall sell and transfer bis stock, -either without the consent of all other stockholders or that he will first offer it to the stockholders or to the corporation before selling to other persons, is binding on persons who become owners of stock. These provisions, which really amount to agreements between stockholders themselves, are' not invalid as against public policy, nor do they amount to an improper restraint of the power of alienation. There seems to be no objection to a corporation reserving to existing members the right to choose their associates. Such a provision justifies the refusal of the corporation to transfer the stock.” And this is supported by a number of-authorities cited in the text.. See, also, the following section 4136, and our own statutes, C. S., 1114, sub-sec. 7, and sec. 1128.
Counsel for appellant have called our attention to the decisions of this Court rendered in
Bridgers v. Bank,
152 N. C., 293, and
Sheppard v. Power Co.,
150 N. C., 776, as tending to establish a contrary doctrine, but we do not think these eases are in point. The questions there presented dealt with the validity of voting trust agreements.
Probably it should also be observed that we are not now considering a case where the restrictions and limitations are contained only in a resolution or by-law of the corporation, and not in the provisions of its charter.
In the ease at bar the limitations under consideration are contained in the defendant’s charter, and they are also set out in its stock certificates. The corporation came into existence with this inherent qualifying restraint as one of the rights and powers which it might exercise. It was agreed to by all the original incorporators, and the same was ap
proved by tbe Secretary of State. Tbe board of-directors bave acted in good faith, and we think tbe judgment of bis Honor, bolding that such was permissible under tbe defendant’s right of organization, must be upheld, in tbe absence of any allegation or proof of arbitrary, oppressive or unreasonable conduct.
Affirmed.