Oldham v. Munitions Mfg. Co. [Vol. 23 (N.S.) fuse parts, detonators and primers and the right to use machines and apparatus in the manufacture of the same and so forth, entered into an arrangement with the defendant stockholders whereby he agreed that if they would form a corporation and would subscribe for 110 shares of stock in that corporation and would pay the full par value of the stock by them so subscribed at the rate of one hundred dollars a share, and would cause the corporation to issue him $117,000 stock fully paid up for the transfer by him to the corporation of his rights and interest as such licensee, he would, out of the stock received by him give them two shares of stock for each share they subscribed and paid for; and it appears that this arrangement was verbal and that there is no memorandum thereof on the records of the defendant corporation. Subsequently the corporation was organized and on April 24, 1916, at the first meeting of the stockholders Mitten made the proposition to sell to the company his property and right as such licensee "for the sum of $117,000, payable in steok of your company, the same to be received in full payment of the subscription to the capital stock of your company heretofore made by me, said stock to be issued to me as fully paid." We gather from this that before this offer was made by. Mitten he had subscribed for $117,000 stock. It appears that the stockholders resolved to accept Mitten's proposition, and they requested the board of directors to accept this offer and issue stock to him in accordance with his proposition. At the first meeting of the directors held on May first, 1916, Mitten's proposition was accepted and there was issued to him as a consideration for the assignment of his rights as licensee 1170 shares of the stock of the Munitions Manufacturing Company fully paid. It may here be interpolated that, whether the action of the stockholders recommending to the board of directors the contract with Mitten, which was subsequently made, was before or after the election and organization of the board, it may not be said to have been mandatory. The stockholders cannot control the board of directors in its management of the corporate affairs. The corporate powers, business and 1920.] Oldham v. Munitions Mfg. Co. property of corporations must be exercised, conducted and controlled by the board of directors. Section 8660, General Code. 68 O. S., 442. The claim of plaintiff with respect to this transaction is that the secret procèss, the right to which was transferred by Mitten to the company, had no market value, that its utility had not been demonstrated at the time of the sale and transfer and its utility for the purpose for which the company intended to use it had not been demonstrated, and further that its utility was then and still is wholly speculative, uncertain and problematical. There is found in the 57 O. S., page 60, the case of Gates, Admr. vs. Tippecanoe Stone Co., et al., in which at page 78 Judge Bradbury lays down a rule which has since been followed in this state and has not by the Supreme Court been in any way modified. In speaking of the case before him. Judge Bradbury says: "This attempt by McLane and his associates to dispose of their property at a fictitious or inflated value to a corporation of their own creation one designed and brought into existence cheifly for that purpose *** should be regarded as a fraud upon subsequent creditors of the concern, although no evil intent accompanied the transaction, and the difference between the actual and inflated value of the property so conveyed should be deemed unpaid subscription upon the stock issued in this way whenever necessary to protect the rights of the corporate creditors." It will be observed from a careful reading of this excerpt that the holding of the Supreme Court is to the effect that if such a transaction is tainted by constructive fraud, that is by "such acts as, although not originating in any actual evil design or contrivance to perpetuate a positive fraud or injury upon other persons, are yet by their tendency to deceive or mislead other persons, deemed equally reprehensible without positive frand". the rule applies. But in order that we may gather from this petition that these defendants have been guilty of constructive fraud, it is necessary for us to discover in its language that there has been Oldham v. Munitions Mfg. Co. [Vol. 23 (N.S.) such a gross inadequacy of consideration that a court of equity will be moved to grant relief on that account. The allegations of the plaintiff are as heretofore quoted. The secret process as we have said is claimed to have been without market value and without demonstrated utility and its usefulness is declared to be speculative, uncertain and problematical. In the exercise of its powers under the law a board of directors acting for and on behalf of the corporation-and we must keep in mind that this was a contract between the board of directors and Mitten-saw fit to accept the process at the offer Mitten made. The rule is that where parties agree upon a consideration and it is one of indeterminate value, the courts will not substitute their judgment for that of the contracting parties but will uphold the contract. 171 Ind., p 323, 343. It avails the plaintiff nothing that, after making the allegations he does with respect to the uncertainty of the value of the process in question, he subsequently says: "If the said contract for the use of said secret process might be said to have any actual value such value was not in excess of $95,000." This is no more than his opinion with respect to an uncertainty which he has before declared and is an unwarranted conclusion of fact. The further complaint of the plaintiff that Mitten did not receive the stock which was afterwards transferred to the stockholders, in good faith as part of the consideration for the transfer to the corporation of his contract with the Alloys Products Company, but that the corporation issued the stock and Mitten received it for the purpose of transferring it to the defendant stockholders in pursuance of the agreement between them and Mitten, is not helpful to the plaintiff, for the reason that we are unable to find that there was an inadequacy of consideration. The agreement made by Mitten with these stockholders, prior to the organization of the company, was the agreement of Mitten and the individuals; and the corporation was in no way involved, unless it could be found from the allegations of the petition that it has not received adequate value. In view of the foregoing we are constrained to find that this petition does not state a cause of action against these defendants. The demurrer is, therefore, sustained. 1920.] Kramer v. Foundry Co. INFORMAL DIVISION OF PROFITS TREATED AS A DIVIDEND. Court of Common Pleas of Montgomery County. JOSEPH KRAMER V. THE KRAMER BROTHERS FOUNDRY CO. ET AL. Decided, December 18, 1918. Corporations-Acquiescence of Stockholders in Informal Acts of the Directors Cures the Irregularity—Division of Profits to the Disadvantage of Certain Stockholders-Equivalent to Declaration of Dividend in which an Omitted Stockholder is Entitled to ParticipateCorporation Estopped from Setting up Inequality of Division as a Defense to its Treatment as a Dividend-Customary Method of Transacting Corporate Business Binding. 1. A division of the profits of a corporation, informally agreed upon by the two chief stockholders owning practically all of the stock, will be construed as a declaration of a dividend. 2. Such a division of profits, acted upon by one of the stockholders to the disadvantage of the others, will be deemed a dividend, notwithstanding the fact that none of the statutory formalities surrounding the declaration of a dividend have been complied with. 3. The fact that there was no formal action by the directors and no setting aside of a specific amount or the declaration of a specified per cent., will not prevent such division of profits from being treated as a dividend. 4. Unanimous consent and acquiescence of the stockholders, acted on by the parties concerned to such an extent as to materially change their position, precludes the assenting stockholders as individuals and the corporation as such, from afterwards setting up legal informalities in matters of internal concern, affecting only the interests of the stockholders, to the overthrow of rights that have been acquired on the faith of the consent and acquiescence. 5. Where two directors of a corporation with the consent and ecquiescence of the remaining directors and stockholders, make a division of the profits of a corporation other than pro rata, and such unequal division is acquiesced in by the remaining stockholders, the corporation will be estopped from setting up the inequality or failure to divide pro rata as a depfense to the payment of such dividend. *Affirmed by the Court of Appeals of Montgomery County without report, July 29, 1919. Kramer v. Foundry Co. [Vol. 23 (N.S.) A. W. Schulman and Mattern & Brumbaugh for plaintiff. Murphy, Ellif & Leen, for defendant. MARTIN, J. This cause comes before the court upon a motion filed by the defendants for a new trial and to set aside the verdict of the jury and for judgment on the special verdict returned by the jury. This case is an action brought by the plaintiff against the defendant to recover a dividend informally declared and paid to the defendant with the understanding that the plaintiff was to permit his dividend to remain with the funds of the company until such time as he saw fit to withdraw it. The petition avers: "That for many years and at the time of the occurence of the matters herein set forth, the plaintiff and defendant, George Kramer, were the controlling stockholders and owners of said company; that owing to its close organization said company never formally declared dividends, but permitted its surplus earnings to accumulate, part of same being invested in building association stock, part re-invested in the business of the corporation and part invested in real estate in a subsidiary company known as the Kramer Brothers Realty Company. That in July, 1907, the defendant corporation had on hand and was possessed of a large surplus of undivided profits; that at said time the following agreement was entered into by and between the plaintiff and the defendant, George Kramer, and the other minor stockholders of the company as individuals and as officers of the corporation. "That said company was to pay to George Kramer as his share of the undivided surplus profits and as a dividend on his stock the sum of eight thousand one hundred and sixty-five dollars and sixty-five cents ($8,165.65) for the purpose of building a home for himself and that the company did then and there and at such time pay to the said George Kramer the said amount and this plaintiff being the owner of 420 shares of stock, was to receive the same amount of stock as a dividend upon his stock, but that by reason of the fact that plaintiff had no need for such sum at said time, it was agreed between the said parties as individuals and the officers and directors of the corporation that the plaintiff was to receive said amount, but he was to allow his said dividend to remain with the funds of the company until such time as he would require it for building a home for himself, etc." |