Business Organizations Law Commons^™

Corporations - Shareholders - Majority Liability For Improper Stock Redemption By Corporation And For Misrepresentations In Private Stock Purchases From Minority Holders, James M. Tobin

Michigan Law Review

In 1942 a seemingly innocuous suit was brought against the Axton-Fisher Tobacco Corporation to determine the propriety of the alteration of a stock redemption. In 1955 Judge Leahy of the Federal District Court for Delaware handed down an opinion on the damages and relief to be given in the case in what he hopefully termed was the final phase of this famous litigation. It is the purpose of this comment to appraise the basis of the recovery allowed by Judge Leahy. Two readily distinguishable problems will be treated: (1) the nature of relief from a stock redemption called by fiduciaries …

Municipal Corporations - Police Power - Delegation Of Power To Patrol Highways To Private Corporation, George Kircos

Michigan Law Review

Defendant was stopped for speeding in Comstock Township, Michigan, and given a "violation ticket". by an employee of Charles Services, Inc., a private corporation which patrolled the highway under an arrangement with the township. At the trial defendant objected to the admission of evidence establishing him as the driver of the speeding vehicle on the ground that it was obtained by one not authorized by law to arrest him. On appeal from conviction, held, affirmed. Evidence obtained by the employee of Charles Services, Inc., is admissible because defendant did not sustain the burden of proving that the employee was …

Corporations - Officers And Directors - Effect Of An Equitable Lien On Directors' Liability, Robert Steele

Michigan Law Review

Defendants, directors of a corporation, appealed from a judgment against them in favor of their company's creditor. The corporation had executed a note promising to repay plaintiff's loan out of the funds from a forthcoming stock issue. The board of directors passed a resolution ordering the officers to repay plaintiff in this manner. The money was then spent for other purposes, with the knowledge of the individual directors, after which the corporation became insolvent. On appeal, held, affirmed. The note and resolution imposed an equitable lien on the fund from the stock sale. The corporation's conversion of this interest …

Corporations - Political Activities - Interpretation Of Statute Prohibiting Political Contributions By Corporation, George Kircos

Michigan Law Review

Defendant corporation, organized to promote the recall of Senator Joseph R. McCarthy, was charged with violating section 346.12 of the Wisconsin statutes, which prohibits corporations doing business in Wisconsin from paying or contributing any money, etc., to promote or defeat the candidacy of any person for nomination, appointment, or election to any political office. The trial court entered a forfeiture judgment against the defendant. On appeal, held, reversed. The statutory phrase "doing business" was intended to limit the scope of the prohibition to corporations organized for profit. Corporations, such as the defendant, organized solely for political purposes are not …

Corporations - Shareholders - Use Of Corporate Funds For Proxy Contest Expenses, Julius B. Poppinga S.Ed.

Michigan Law Review

Following a proxy contest in which the insurgent faction of stockholders was successful, the new board of directors paid out $28,000 to members of the old board to cover expenses incurred by them, and also used $127,000 to reimburse the prevailing group. The latter expenditure was approved by a sixteen-to-one majority vote of the stockholders. Plaintiff brought a derivative action seeking restoration of both amounts. The trial court dismissed the complaint, and the appellate division affirmed this judgment. On appeal to the New York Court of Appeals, held, affirmed, three judges dissenting. Corporate directors may make reasonable expenditures in …

Corporations - Officers And Directors - Acquistion Of Corporate Opportunity After Rejection By Board Of Directors, James M. Tobin

Michigan Law Review

Defendant Odlum, president and director of Airfleets, Inc., was privately offered the opportunity to buy patents for a self-locking nut and the stock of the company which held an exclusive license to manufacture it. The board of directors, when offered the opportunity by Odlum, approved purchase of the stock but rejected the patent rights. Odlum then purchased these rights for himself and a minority stockholder brought a derivative suit for an accounting. Held, a director is absolutely disqualified from purchasing a corporate opportunity for himself, even after the opportunity has been rejected by a disinterested majority of the board …

Corporations - Shareholders - Power Of The Majority To Ratify Director's Fraud, Paul A. Heinen

Michigan Law Review

Plaintiff, a stockholder in the Kroger Company, brought a derivative suit against a subsidiary of the company and certain officers and directors of both the parent and the subsidiary. It was alleged that . Kroger's directors had fraudulently waived the company's preemptive right to a new issue of stock of the subsidiary and had then purchased the shares for their own accounts at a price far below the market value. The defendants answered that the sale had been ratified by a majority in interest of disinterested stockholders to whom all the details of the transaction had been explained, and denied …

Corporations - Officers And Directors - Agreement Interfering With Management By Board Of Directors, Edward H. Hoenicke S.Ed.

Michigan Law Review

Plaintiffs, minority stockholders in a closely held corporation, asked that the court declare invalid an agreement between the majority stockholders and their "agent-directors" for the management of the business. The agreement provided that for ten years the stock of the parties to the agreement would be voted as a unit as any seven of the agents should direct or, if they could not agree, as directed by an arbitrator chosen by them. The agents were to be elected to the board of directors by the stockholders who appointed them. Under a cumulative voting provision, the parties to the agreement had …

Corporations - Stockholders - Fiduciary Relationship In Sale Of Controlling Stock Interest, Morton A. Polster S.Ed.

Michigan Law Review

This comment is concerned with the duty owed by the controlling stockholders to the non-controlling stockholders when there is a sale of the controlling interest. Recently this question was considered by the United States Court of Appeals for the Second Circuit in Perlman v. Feldmann, and the opinion, reversing the lower court and accompanied by a vigorous dissent by Judge Swan, deserves careful consideration.

Corporations - Charter - Change Of Voting Right By Amendment, Dale W. Van Winkle S.Ed.

Michigan Law Review

Defendant, incorporated in 1938 with an authorized capital stock of 500 shares, amended its articles of incorporation in 1940 to increase the common stock to 2,000 shares, and to authorize the issue of preferred stock. By the amendment, the voting power was vested exclusively in the common stock, with the exception that the holders of preferred stock would acquire temporary voting power upon default of four semi-annual dividends. Default in payment of dividends occurred and the preferred stockholders exercised the right to vote from 1943 on. In 1953, a second amendment was proposed and passed by a majority in interest …

Corporations - Stockholders - Effect Of State Constitutional Provisions On Liabilty To Creditors For Unpaid Subscriptions, Douglas Peck S.Ed.

Michigan Law Review

Basset and Company, an Oklahoma corporation, issued stock to defendant for which defendant never paid. The sum due was carried on the corporate books as "subscriptions receivable." The corporation became bankrupt and the trustee brought suit in the federal district court to recover the amount due on the subscriptions. Held, judgment for the defendant. Under the Oklahoma Constitution, where stock is issued for consideration which is less than par value, the issue is void. The stock certificate cannot serve as a consideration to support the would-be stockholder's promise to pay for the stock, and no liability attaches to the …

Corporations - Provisions In Articles Authorizing Call Of Common Stock At Option Of Corporation, Dale W. Van Winkle S.Ed.

Michigan Law Review

Amendments to the articles of organization of the defendant corporation provided that the board of directors might at any time purchase its common stock in whole or in part from any holder thereof. After the directors initiated proceedings to purchase a portion of the shares held by plaintiff, plaintiff brought a bill in equity asking that an injunction be issued to restrain the corporation from proceeding further. The superior court entered a decree for the defendant. On appeal, held, affirmed. The provision authorizing the call of common stock is neither forbidden by statute nor contrary to public policy. Lewis …

Corporations - Extent To Which Vote Of Proxy Binds The Shareholders, Herbert R. Brown S.Ed.

Michigan Law Review

Plaintiff; in a derivative action, charged certain directors of the corporation with appropriating a corporate opportunity to their own benefit. Defendant directors moved for summary judgment· on the ground that the questioned transaction was ratified by the stockholders, with plaintiff's stock being voted by proxy in favor of ratification. Held, motion for summary judgment denied. The plaintiff was not estopped from suit even though her proxyholder, the corporation management, voted her stock for the ratification, since she had no notice that the question was to be voted on when she gave her proxy. Gottlieb v. McKee, (Del. Ch. …

Tax-Free Corporate Acquisitions - The Law And The Proposed Regulations, Robert L. Merritt

Michigan Law Review

The quest for interpretation is indeed an ancient one. Our life path is pervaded by a search for meanings.

It has been said of the law that it is sometimes better to have a bad rule than to have no rule. I suppose the rationale is that unsatisfactory certainties at least permit action, and are susceptible to a change for the better, the very badness of the rule serving to accelerate the equitable resolution. Being neither philosopher nor historian, I do not know whether that patience which awaits ultimate improvement is always a virtue.

Suits Against Unincorporated Associations Under The Federal Rules Of Civil Procedure, John Kaplan

Michigan Law Review

Concepts, Benjamin Cardozo has said, "are useful, indeed indispensable, if kept within their place. We will press them quite a distance. . . . A time comes, however, when the concepts carry us too far, or farther than we are ready to go with them, and behold, some other concept, with capacity to serve our needs is waiting at the gate. 'It is a peculiar virtue of our system of law that the process of inclusion and exclusion, so often employed in developing a rule, is not allowed to end with its enunciation, and that an expression in an opinion …

Partnerships - Valuation Of Assets On Death Of A Partner, John F. Dodge, Jr. S.Ed.

Michigan Law Review

There are three phases to the problem of arriving at a final dollar and cents valuation of a deceased partner's share in a partnership. In their proper chronological order they are: a determination of what the partnership assets are, a valuation of those assets once determined, and a division of the remainder (after liabilities have been subtracted) into the proper proportions according to the partnership agreement. Only the second phase is within the scope of this comment, the purpose of which is to examine various asset valuation methods both with respect to, and in the absence of, a valuation established …

Civil Procedure - Process - Amendment When A Partnership Is Served As A Corporation, Donald W. Shaffer

Michigan Law Review

Plaintiff instituted a negligence action for personal injuries by serving a summons and complaint on one Moriarty as an officer of Moriarty Manufacturing Company, intending thereby a substituted service on this company. Plaintiff believed the named firm to be a corporation, but it was in fact a partnership of which Moriarty was a member. There was no appearance or answer. Two and one-half years after the initial service, an amended summons and complaint were served on all of the partners. In answer, defendants pleaded a two-year statute of limitations and moved for a summary judgment, which was granted. On appeal, …

Corporations - Capital Reduction Surplus As A Source Of Divided Payments, John B. Huck

Michigan Law Review

At the beginning of 1936, plaintiff, a Wisconsin corporation, had an earned surplus deficit of $106,134.89, and a surplus of $685,642.89 created by a reduction of capital stock. Net earnings for 1936 were $121,515.96, none of which were distributed as dividends. An undistributed profits surtax was assessed on the entire current net earnings. Plaintiff sued for a partial refund under an amendment providing retroactive relief for corporations which were prohibited by law from paying dividends during the existence of a deficit in accumulated earnings at the time when the tax was paid. The district court denied relief. On appeal, held …

Corporations - Stockholders - Cancellation Of Stock Issues Without Consideration, James W. Beatty S.Ed.

Michigan Law Review

At the beginning of 1936, plaintiff, a Wisconsin corporation, had an earned surplus deficit of $106,134.89, and a surplus of $685,642.89 created by a reduction of capital stock. Net earnings for 1936 were $121,515.96, none of which were distributed as dividends. An undistributed profits surtax was assessed on the entire current net earnings. Plaintiff sued for a partial refund under an amendment providing retroactive relief for corporations which were prohibited by law from paying dividends during the existence of a deficit in accumulated earnings at the time when the tax was paid. The district court denied relief. On appeal, held …

Corporations - Preference Rights On Dissolution, Robert B. Fiske, Jr. S.Ed.

Michigan Law Review

The capital structure of the defendant corporation consisted of class A, class B, and preferred stock. According to the articles of association, the class A stock was entitled to a ten percent dividend before any dividend was paid on the class B. After the class B stock had also received a ten percent dividend, the two classes were to share equally in any further dividends. The charter further provided that on dissolution the holders of the class A stock were entitled to cash to the amount of the par value of their stock before any payment in …

Corporations - Reclassification Of Securities As A Purchase Under Section 16 (B) Of The Securities And Exchange Act, Eric E. Bergsten

Michigan Law Review

Plaintiff, a minority stockholder in the Old Town Corporation, brought action on behalf of the corporation to recover alleged "shortswing" profits made by defendants, who were officers, directors and large shareholders of Old Town, on the sale of 45.9 percent of the outstanding stock of the corporation. The corporation had, with the approval of 78 percent of the owners in interest, reclassified the 320,402 outstanding shares of $5 par common stock as 320,402 shares of $1 par common and 320,402 shares of 40¢ cumulative preferred stock of $7 par value. This reclassification was done for the frank purpose of increasing …

Taxation - Federal Income Tax - Corporate Accumulations, Stock Dividends And The "Preferred Stock Bail-Out," And Taxability Of The Corporation Upon The Distribution Of "Inventory Assets" Under The Internal Revenue Code Of 1954, Alice Austin S.Ed.

Michigan Law Review

It is the purpose of this discussion to indicate, with respect to corporate accumulations and distributions, some of the major interpretative problems existing under the 1939 code which Congress has failed to resolve, as well as some of the major interpretative difficulties which arise for the first time under the 1954 code.

Corporations - The Fudiciary Duty Of Directors In The Issuance Of Stock Subject To Preemptive Rights, Howard M. Downs

Michigan Law Review

In Gord v. Iowana Farms Milk Co. , a stockholder protested the issue to the defendant of certain shares of stock in a closely held corporation. At the time of the sale, the plaintiff was a director and secretary-treasurer of the corporation with access to the corporate books and knowledge of the corporate assets. At the meeting at which the stock was issued, the plaintiff signed a statement saying "at the present time I do not elect to purchase any stock. . . ." The stock, sold for $15 a share, had a value variously estimated at $50 to $103.22. …

Corporations - Right Of Shareholder Under Uniform Stock Transfer To Have Shares Transferred Contrary To Corporation By-Laws, Lawrence N. Ravick S.Ed.

Michigan Law Review

The defendant, a Michigan corporation, adopted a "constitution" (by-laws) which contained the following provisions: " ... no member shall be allowed to own more than five shares of stock at any one time." This restriction was not written into the articles of incorporation or printed upon the stock certificates. Plaintiff was at one time the president and director of the defendant corporation. While an officer, he acquired twenty-five shares of stock, having at the time full knowledge of the by-law provisions. When he was no longer an officer, plaintiff purchased an additional share of defendant's capital stock and requested the …

Corporations - "Personal Interst" Of Directors In Corporate Transactions, Richard R. Dailey

Michigan Law Review

Serious dissension had developed between two factions of the seven member board of directors of defendant corporation. Group A, consisting of four members, represented a working majority of the outstanding stock recently acquired by a group of investors. Group B, consisting of three members, had constituted the active management of the corporation for a number of years. The resignation of group B was probable if group A continued to dominate the board. It was proposed that stock of the defendant be exchanged for stock in another corporation. Under the overall plan, group A was to resign and two …

Criminal Law- False Pretenses - Partner Fraudulently Obtaining Partnership Funds, Paul R. Haerle

Michigan Law Review

Defendant and another were equal partners in a used car business. Defendant took in an automobile, paying for it with his own funds. Representing that he had paid more than he actually had, he induced his partner to write him a check drawn on the partnership account. Defendant was indicted for obtaining half of the excess by false pretenses. The district court directed a verdict of acquittal. On appeal by the state, held, affirmed, three justices dissenting. A partner cannot be guilty of obtaining by false pretenses from the partnership; the statute in question specifies that it must be …

Conflict Of Laws - Penal Provisions In Foreign Law - Liability Of Shareholders In De Facto Corporation, James M. Potter S.Ed.

Michigan Law Review

Defendants, residents of Tennessee, while attempting to form a corporation under the laws of Arkansas, inadvertently failed to file the articles of incorporation with the county clerk, although they were filed with the Secretary of State of Arkansas. The resulting business association was an Arkansas de facto corporation. Under Arkansas law the shareholders of a de facto corporation are personally liable for the debts of the corporation. Plaintiff, a creditor who dealt with the corporation, sued in a Tennessee court and asked that the Arkansas rule be applied. The trial court refused to do so on the ground that it …

Corporations - De Facto Existence - Necessity Of Good Faith Attempt To Incorporate Under And Of Colorable Compliance With Incorporation Statute, Richard R. Dailey

Michigan Law Review

Defendant, a purported holding corporation, was organized in 1922 before the enactment of a state statute authorizing such corporations. The articles of incorporation stated that the purpose of the corporation was "to acquire, own and hold" shares of stock in a realty company. There was actual user of corporate power by the defendant under this attempted incorporation until the time of this suit in 1954. The legislature in 1941 amended the incorporation statute to authorize incorporation of a holding company, but no action was taken by the defendant pursuant to this amended statute. In an action for a declaratory judgment, …

Partnership - Dissolution On Death - Right Of Representatives Of The Deceased Partner To Share In Good Will, Richard M. Adams

Michigan Law Review

Plaintiff sought a judgment against the administrator of his deceased partner to compel the conveyance of the deceased's one-half interest in the partnership assets. Under the terms of the partnership agreement the surviving partner had the right to buy out the interest of the deceased partner at its "then book value." The administrator contended that good will was a valuable partnership asset, even though not carried on the books, and should be taken into account in determining the price of the deceased's interest. On appeal from a judgment for plaintiff, held, affirmed. By setting the price of the deceased's …

Corporations - Securities Regulation - Investment Contracts Under Securities Act Of 1933, James W. Beatty S.Ed.

Michigan Law Review

Plaintiffs purchased tracts of twenty acres, part of a larger tract owned by the defendant, for the purpose of developing the tracts into small citrus groves. Plaintiffs also executed with defendant a care and management contract, whereby plaintiff was to give directions as to the marketing of the crops on the tract; the defendant management company was to follow these directions but would still supervise harvesting and marketing and would receive its compensation therefor. Plaintiff brought an action under the Securities Act of 1933 to impose civil liability for fraudulent misrepresentations and material omissions concerning the value of the land. …