117 N.E.2d 610
No. 33596Supreme Court of Ohio.
Decided February 10, 1954.
Corporations — Powers, express, implied — Character determined, how — Objects of formation and business stated in articles — Board of directors — Action determining nature and scope of business — Not binding on future board members — Insolvent building and loan association in voluntary liquidation — Assets transferred to new corporation in exchange for shares — Powers of new corporation — Not trustee for purposes of liquidation.
1. An Ohio corporation may exercise all powers expressly given to it by its charter, together with such implied powers as are necessary to carry into execution those expressly conferred.
2. The actual character of a corporation is determined by the objects of its formation and the nature of its business as stated in its articles of incorporation, and not by any limited but permissible activity in which, under its charter, it may choose to temporarily engage.
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3. The action of a board of directors of a corporation determining the nature or scope of the business to be carried on by it is not binding on future members of the board of the same corporation.
4. Where an insolvent Ohio building and loan association is in voluntary liquidation under the supervision of the Common Pleas Court pursuant to Section 8623-79 et seq., General Code, and the directors of such corporation devise a plan which, after notice to all its creditors and shareholders, is approved by the court, and, as provided in the plan, the corporation transfers its assets to a new corporation in exchange for all the shares of the new corporation, and all the creditors and shareholders of the liquidating corporation accept such shares in full payment of their claims against such corporation, the new corporation does not hold such assets in trust for the purpose of continuing the liquidation thereof by reducing them to cash and distributing the proceeds to the shareholders of the new corporation, but may exercise such rights and powers with respect to the assets as its charter and the law authorize.
APPEAL from the Court of Appeals for Cuyahoga county.
This cause is here on an appeal from the Court of Appeals for Cuyahoga county by reason of the allowance by this court of a motion to certify the record.
In 1930, the Atlas Savings Loan Company, hereinafter called Atlas, a building and loan association operating in the city of Cleveland, went into voluntary dissolution under the provisions of Section 9665 et seq., General Code, because of insolvency.
Pursuant to Section 8623-79 et seq., General Code, the directors of Atlas, as liquidating directors, began to liquidate its assets and continued so to do until March 1935 when such liquidating directors applied to the Common Pleas Court of Cuyahoga County for a court liquidation under Section 8623-85, General Code, which application was granted. The liquidation then continued under the supervision of the court until
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September 1939, at which time the liabilities of Atlas had been reduced from $5,000,000 to $915,000, consisting almost wholly of deposit claims.
An application in writing was then filed in the court by the liquidating directors, requesting, among other things, that they be authorized to form under the laws of the state of Ohio a corporation with an authorized capital stock of a sufficient number of shares to permit a distribution of one share of no par value for each $20 of the remaining deposit claims, and one share of no par value for each 20 shares of stock of Atlas, and that they be further authorized and empowered to transfer all the assets of Atlas to the new corporation and be permitted to accept, in consideration therefor, the capital stock of such corporation and to distribute the same to the depositors and shareholders of Atlas on the basis suggested.
As a part of this application, the applicants stated “that at the time of the filing of this application approximately four thousand one hundred and two (4,102) depositors hold claims against said dissolved corporation in the amount of fifty dollars ($50) or less, totaling approximately forty-one thousand six hundred and fifty dollars ($41,650), leaving one thousand six hundred and eighty-nine (1,689) depositors with claims in excess of fifty dollars ($50).”
The application further requested authority to borrow a sufficient sum, and to pledge such part of the assets of said corporation necessary to secure the same, to pay all depositors and creditors with claims of $50 or under.
The court ordered that a copy of this application be mailed to all the shareholders, depositors and other creditors of the corporation, together with notice of the date for hearing thereon, and that publication of such notice be made. This was done. There is no evidence in the record that any shareholder or depositor
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opposed the granting of the application. The court, on hearing, granted the application with minor modifications, one of the modifications being “that the shares of the new corporation so to be organized shall have a par value of one dollar ($1) per share, instead of being without par value.”
Pursuant to the order of the court, on September 28, 1939, a new corporation, under the name of Satla Realty Corporation, hereinafter called Satla, was formed and all the remaining assets of Atlas, except those theretofore hypothecated for a loan made to pay depositors and creditors with claims of $50 or under, were transferred to it.
The third article of the articles of incorporation, hereinafter referred to as charter of Satla, provides:
“The purpose or purposes for which it is formed are purchasing, and otherwise acquiring, holding, owning, mortgaging, pledging, selling, transferring and in any other manner disposing of, and dealing in and with, real property and interests therein, and goods, wares, merchandise and other personal property, of any and every class and description and wherever situate, and doing any and all things incident thereto.”
The sixth article of the charter provides:
“The following provisions are hereby agreed to for the purpose of defining, limiting and regulating the exercise of the authority of this corporation, or of the directors or of all of the shareholders; all of the shares authorized by these articles shall, upon the organization of this corporation, be issued to the directors of The Atlas Savings Loan Company, a dissolved Ohio corporation, in pursuance of, and as authorized by, a certain order and decree of the Court of Common Pleas of Cuyahoga County, Ohio, entered September 5, 1939, in cause No. 423646, pending in said court, styled, `In re Liquidation of The Atlas Savings and Loan Company, a Dissolved Corporation,’ and in payment
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for all of the assets of said dissolved corporation (except only such part thereof as is required or authorized by said order and decree otherwise to be disposed of), subject to all indebtedness of, and claims made or asserted against, said dissolved corporation, the officers or directors thereof, which indebtedness and claims shall, to the extent to which the same are valid and enforcible against said dissolved corporation, or said officers or directors, or any thereof, be assumed by this corporation. * * *”
Pursuant to the authority granted by the Court of Common Pleas under which Satla was organized, the president of Atlas circulated a letter, designated plaintiff’s exhibits 24A and 24B, in which the plan for the distribution of the stock of Satla is fully set forth.
The pertinent paragraphs of this letter are as follows:
“During the month of September, 1939, Judge Samuel H. Silbert of the Common Pleas Court of Cuyahoga County, Ohio, granted an application of the directors of The Atlas Savings Loan Company, permitting and allowing the dismissal of superadded liability actions, the payment of all deposit claims of $50 or under in full, the exchange of one share of stock in a new corporation to be organized under the laws of the state of Ohio for each $20 in deposit claims, the exchange of one share of common capital stock of said new corporation for each twenty shares of stock of The Atlas Savings Loan Company, and the payment of funds withheld from distribution by the directors in connection with the double liability actions.
“The new corporation contemplated in the order of the court has been organized by the directors of The Atlas Savings Loan Company and, within a short time, all the assets of the dissolved corporation will be transferred to such new corporation. The new corporation is to be known as Satla Realty Corporation,
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with a common capital stock of 43,000 shares. The directors will be in a position to make distribution of the new stock for depositors’ claims and stockholders’ claims on the 9th day of November, 1939, at the offices of the dissolved corporation, 5642 Broadway.
“On the same date, the directors of The Atlas Savings Loan Company will also distribute funds withheld from distribution to the stockholders. Before this exchange is made, each depositor and stockholder must surrender passbooks and stock certificates of The Atlas Savings Loan Company.” (Italics supplied.)
The next to the last paragraph of this letter states that “the Satla Realty Corporation now belongs to the depositors and stockholders of The Atlas Savings Loan Company, and such corporation can now be continued as a going concern.”
The directors of Atlas became the original directors of Satla. At the first meeting of the directors of Satla, on December 11, 1939, the following resolution was unanimously adopted:
“It is not only the intent of the board to liquidate the assets of the Satla Realty Corporation as speedily as possible, but they are duty bound to do so to enable the present shareholders, who are mainly the former depositors, to obtain their funds as speedily as possible. Furthermore, it is the formal declaration of the present directors, even though the Satla Realty Corporation was organized as a going concern, to consider it only as a liquidating medium.”
For ten years thereafter the directors of Satla carried on the process of selling assets of the corporation from the proceeds of which payments were made to the shareholders of the corporation in the aggregate of approximately $19 per share, an amount equal to their deposit claims in Atlas.
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In 1949, the Satla directors proceeded to use certain funds derived from the sale of assets which formerly belonged to Atlas for the purpose of making mortgage loans. Objections having been made to this procedure, on June 1, 1950, the shareholders owning more than two-thirds of Satla’s outstanding capital stock amended article three of its charter by adding thereto the words, “and investing in mortgages on real estate.”
On November 2, 1949, the present action was instituted by the plaintiff, Czech Catholic Union, challenging the right of Satla to use the funds of the corporation for any purpose other than distribution to shareholders and seeking an injunction to restrain such other use.
On November 8, 1950, an amended petition was filed in which the plaintiff alleges that it was the owner of 455 shares of the common capital stock of Satla; that it brought the action on behalf of itself and “on behalf of all other shareholders of the defendant corporation constituting a common class”; that the action taken at the shareholders meeting of June 1, 1950, to amend the charter permits operation of Satla contrary to the order of the court; and that Satla was formed solely for the purpose of liquidating the assets of Atlas. The prayer of the amended petition is, inter alia, that Satla be enjoined from investing any accumulations held by it; and that it be ordered to liquidate as rapidly as possible and distribute the avails thereof to the shareholders.
The case was tried in the Court of Common Pleas of Cuyahoga County by a judge sitting without a jury, who found for the defendants and entered a final judgment dismissing the petition and the cross-petition of one Hronek, one of the defendants, who in his cross-petition admits the facts set out in the amended petition and prays for the same relief.
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On appeal, the cause was heard on questions of law and fact by the Court of Appeals for Cuyahoga county on the record made in the Court of Common Pleas. The Court of Appeals found in favor of the plaintiff and Hronek, appellees herein, decreed the liquidation of the assets of Satla, specified the manner of the distribution of such assets, required the individual defendants to reimburse Satla for expenses incurred in that litigation, and ordered that defendant Satla pay attorney fees and other expenses of the appellees. Whereupon, the defendants appealed to this court.
Other facts are stated in the opinion.
Messrs, Spieth, Spring Bell, for appellees.
Messrs. Squire, Sanders Dempsey, Mr. Paul J. Bickel and Mr. John Lansdale, Jr., for appellants.
HART, J.
The issue in this case as stated by the trial court is:
“Was Satla organized as a going concern with power to engage in business according to its general `purposes’ article or was it organized only as a medium to liquidate the remaining assets of Atlas?”
The question as more specifically stated by the appellants is:
“Where an insolvent Ohio building and loan company is in voluntary liquidation under the supervision of the Common Pleas Court pursuant to Section 862385 and the directors of the company devise a plan which, after notice to all of the creditors and shareholders, is approved by the court and, as provided in the plan, the liquidating corporation transfers its assets to a new corporation in exchange for all of the shares of the new corporation and all of the creditors and shareholders of the liquidating corporation who can be located accept such shares in full of their claims against the liquidating corporation, does the new
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corporation hold said assets in trust for the purpose of continuing the liquidation thereof, reducing them to cash and then distributing the preceeds to these shareholders of the new corporation who formerly were creditors of the old corporation, or on the contrary, does the new corporation hold such assets with the same rights and powers with respect thereto as corporations generally can exercise?”
As a preliminary to a final determination of the question presented, it will be profitable to describe and evaluate the corporate and capital structure of Satla, in the light of what was actually done in creating it.
Considering the plan of reorganization as proposed and as described in the application therefor, above referred to, and as later modified by the decree of the court approving such application, we find specific facts as follows:
At the time of the filing of the certificate of dissolution of Atlas, there were issued and outstanding 4,056 shares of the common capital stock of that corporation of the par value of $100 per share. By the reorganization, this capital structure was changed and the shareholders were issued one share of a par value of $1 in Satla for each 20 shares of the par value of $100 per share in Atlas, or a total of 202.8 shares.
At the time of the filing of the application for dissolution of Atlas, there were approximately 4,102 depositors in that institution each holding claims against it in a sum of $50 or less, a total of approximately $41,650, leaving 1,689 depositors each with claims in excess of $50. Satla negotiated a loan, secured by the pledging of assets, with which it paid off the depositors, each of whom held deposit claims of $50 or less. Under the plan there were issued to the 1,689 depositors, each having deposit claims in excess of $50, one share of the capital stock of Satla, having a par value of $1 per
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share, for each $20 of the remaining and unpaid deposit claims. There were issued to such 1,689 depositors a total of approximately 41,000 shares of such capital stock.
Clearly, under this arrangement, depositors of Atlas surrendered their depositor claims against Atlas in consideration for the issuance to them of the stock in Satla to which the assets of Atlas had been transferred. The difference between the total par value ($1 per share) of the capital stock of Satla, which was treated by it as paid up stock, and the value of the assets transferred to Satla amounted to more than $1,300,000 less the actual debts of Satla for money borrowed to pay off in cash the depositor claims of $50 or less plus small expense items amounting to approximately $56,000. Such difference must necessarily be regarded and treated as paid in surplus, making the book value of the stock in Satla approximately $31 per share.
It is true that the original deposit accounts were carried on the books of Satla as a matter of record but not as debts of such corporation. This is conclusively shown by the fact that, as capital assets were sold and liquidated, dividends equal to such converted assets in amounts far beyond the earnings of the new company were declared on the stock and not as dividends on the deposit accounts. Clearly, also, under the new arrangement, the depositor shareholders could not have brought suit against Satla on their deposit claims, which fact is further evidence that the depositors had surrendered their deposit claims for stock in Satla.
It is true that, under the application for the transfer of assets to Satla under the order of the court, Satla was to assume the debts of Atlas but such assumption related to the remaining actual indebtedness of Atlas
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plus a newly created indebtedness to pay off depositors having deposits of $50 or less in Atlas, and not to claims such as depositors accounts above $50 which had been liquidated by the issuance of stock in lieu thereof. Satla was not, nor was it intended that it should be, an insolvent institution at its inception. Otherwise, it would not differ from Atlas and there would have been no point in its organization.
The facts show also that Satla was from the beginning operated as a going concern — not simply as a liquidating trust — and earned, aside from the sale of assets, between $90,000 and $100,000 annually.
Doubtless, a corporation could be organized with limited powers to act as a trustee only to carry on certain business or to liquidate an insolvent institution. However, in the instant case, the application, as well as the court decree, was silent as to what specific treatment or disposition the corporation to be formed was to make of the assets of Atlas to be transferred to it. The application and decree were silent also as to the proposed purpose clause or clauses of the new corporation. The application and decree made specific provision only as the basis upon which stock of and deposit credits in Atlas should be exchanged for stock in the new corporation.
The “plan” as set forth in the application had as its objective the satisfaction of the claims of all parties having any interest in the liquidation of Atlas. The sole purpose and object of the organization of a new corporation and the transfer of all the assets of Atlas to it was to terminate the jurisdiction of the court in the liquidation of Atlas and to place the control of the property transferred in the hands of the shareholders and creditors of Atlas through the issuance of common stock to them in proportion to their interests in and claims against Atlas. The creditors of Atlas were issued, without restricted ownership, stock in the new
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corporation, not certificates of participation as was done in the case of Shuster v. North American Mortgage Loan Co., 139 Ohio St. 315, 40 N.E.2d 130, where a corporation was organized as a trustee for the participation-certificate holders as beneficiaries of the trust. Likewise, a corporation might enter into a contract whereby its corporate activities could be limited to a trusteeship, but here there was no such contract.
As above stated, at the first meeting of the board of directors of Satla, the board, as it had a right to do, adopted a resolution to liquidate the assets of Satla as speedily as possible and for a time the affairs of the corporation were conducted along those lines. For instance, the accounting system carried under the term, “liabilities,” the amount of the depositor accounts as “participating accounts” rather than reflecting them in the capital account as investments in stock of the corporation. The audit reports show that, as liquidating payments were made to the shareholders of Satla, the “participating accounts” were reduced by the same amount pro rata until they were by that process entirely eliminated by the end of 1947. No charges for interest were ever added to this item in the financial statement, and none was ever credited as payments on these accounts.
After 1947, as assets of Satla were sold, the losses suffered or profits made from such sales were subtracted from or added to the reserve fund. During the period in question, many entries were carried on the books of the corporation, indicating that the transactions had to do with the liquidation of a closed savings and loan association. For instance, the minutes of a board meeting of the corporation show that a resolution was adopted declaring “a liquidating dividend of $2 per share on the stock of Satla Realty Corporation,
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which is equivalent to 10 per cent payment on the remaining balances in the passbooks of the old Atlas Savings and Loan Company.” In the tax returns of the corporation, these “liquidating” dividends were not set up as income on the stock, but were treated as though they were payments of obligations.
All this history of the activities of the corporation was admissible in evidence, not for establishing the limits of the powers of the corporation, but solely for the bearing which it had in the interpretation of such powers. After all, the board of directors of the corporation could not bind the action of future members of the board as to the policy or scope of the activities of the corporation. The corporation and its board of directors could clearly change the character and nature of the business of the corporation so long as the business was confined to the express or clearly implied purposes authorized in its charter.
The owners of a corporation are its shareholders, and they have the authority to elect successive directors to carry on the business and effectuate the policies of the corporation. If a board of directors can by resolution limit the scope of corporate activities for the future, it can thus wrest the effective control of the corporation from the shareholders. Concededly, no board of directors can thus usurp the power of control of the corporation vested by law in the shareholders.
It is elementary law that the purposes of a corporation and its powers with respect to those purposes are to be found in its charter granted to it by the state.
“The actual character of a corporation is determined by the objects of its formation and the nature of its business as stated in the articles themselves. A corporation cannot be made one kind merely by labeling
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it such if its declared objects and purposes show it to be something else.” 13 American Jurisprudence, 187, Section 37 People, ex rel. Nelson, County Collector, v. Rockford Masonic Temple Bldg. Assn., 348 Ill. 567, 181 N.E. 428, 83 A.L.R., 768.
Furthermore, the action of a board of directors determining the nature or scope of the business to be carried on by the corporation is not binding on future members of the board of the same corporation. Thomas v. Matthews, 94 Ohio St. 32, 113 N.E. 669; Ray v. Homewood Hospital Inc., 223 Minn. 440, 27 N.W.2d 409.
In 1950, more than two-thirds of the shareholders of Satla voted to amend the charter of the corporation so as to authorize the directors to engage in a mortgage-loan business. The courts have no jurisdiction to supplant that authority at the instance of a minority shareholder on the ground of illegal exercise of corporate power.
In accordance with the views herein expressed, the judgment of the Court of Appeals is reversed and that of the Common Pleas Court affirmed.
Judgment reversed.
MIDDLETON, TAFT, STEWART and LAMNECK, JJ., concur.
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