Opinion
No. 133774
Decided October 26, 1970.
Corporations — Merger contract — Construction — Officers and agents common to corporations — Imputed knowledge — Duty of acquiring corporation to purchase stock of acquired corporations — Price to be paid for shares.
1. Parties to a contract cannot impose any legal obligation on one who is not bound by such contract to perform any of its provisions.
2. A contract executed by the shareholders of a corporation as shareholders cannot bind the corporation.
3. Generally, the fact that two or more corporations have officers or agents in common will not, of itself, impute the knowledge gained by such officers or agents while acting for one corporation to another corporation in which they hold office also.
4. Where the merger of two corporations with an acquiring corporation is accomplished by the officers and a majority of the shareholders of each corporation, and the contract contains a provision that the acquiring corporation will purchase shares when an offer of sale is made by the shareholders of the acquired corporations, the shareholders' offer to sell shares is sufficient to bind the acquiring corporation.
5. Where a contract by which an acquiring corporation agrees to and does acquire controlling interest in two corporations provides that the acquiring corporation will purchase shares offered for sale by the shareholders of the two acquired corporations at a price reflected in the last preceding audited statement, the audited statements which came into being in February 1967 are the relevant statements with respect to the shareholders' offer which came to the knowledge of the corporation in May 1968, and statements which came into being in June 1968 are the relevant statements with respect to the offer communicated to the corporation in October 1968.
Messrs. Gould, Bailey Farquhar and Mr. James R. Gould, for plaintiff.
Messrs. Boesch Boesch and Mr. Charles H. Boesch, for defendant The Mutual Tool Die, Inc.
Messrs. Miller, Compton, Long Smith, Mr. Donald M. Compton and Mr. William Macbeth, for defendant Donald Compton.
This is an action for declaratory judgment.
During the trial the court reserved its decision on plaintiff's objection to all testimony of the defendant, Mutual Tool Die, having to do with a competing firm known as Prototype Tool and any line of questioning concerning some limitation of eighty per cent. The court sustains the objection and strikes such testimony.
On January 9, 1967, all the parties to this action were shareholders of Browder Industries, Inc., and Mt. Sterling Industries, Inc. On that date, they entered into a written contract whereby, among other things, defendant, the Mutual Tool Die, Inc., hereinafter referred to as Mutual Tool, agreed to and did acquire controlling interest in each corporation, by purchase of additional shares of the voting common stock of Browder Industries, Inc.; Mt. Sterling Industries, Inc., being a subsidiary of Browder Industries, Inc.
The second paragraph of paragraph seven of said contract provides as follows:
"The said Browder, Compton and Minch, shall have the right to offer shares owned by them in writing to Mutual or its assignees at any time subsequent to the date of this agreement and Mutual or its assignees shall purchase and pay for said shares offered (at the price as reflected in the last preceding audited statement), on or before one year of the date of said offering."
Paragraph 6-B of said contract contains the following provision:
"That the shares of preferred stock presently outstanding contain no voting rights and that same may be redeemed by Browder Industries, Inc., at the rate of $100.00 per share until July 1, 1967, and that the redemption price subsequent to said date is $150.00 per share plus accumulated dividends that all parties to this agreement agree that action will be taken by Browder Industries, Inc., prior to January 1, 1969, to redeem said shares in accordance with the terms thereof."
The plaintiff, Jack E. Browder, in accordance with paragraph seven of the contract, by a writing dated April 4, 1968, offered to sell his remaining shares in Browder Industries and Mt. Sterling Industries. This written offer was presented at a meeting of the Board of Directors of Browder Industries, Inc., held at the offices of Mutual Tool on May 1, 1968. Four of the directors present at such meeting were also at that time directors of Mutual Tool. Rudy Dudon, Sr., was and is president of Mutual Tool and was chairman of the board of directors of Browder Industries. The other three directors of Mutual Tool present at the Browder meeting were also chief executive officer, vice president and the secretary of Mutual Tool. The secretary was also the attorney for the companies.
Mutual Tool failed and refused to purchase the shares of Jack E. Browder, and, thereafter, he brought this action for declaratory judgment.
Defendant, Donald M. Compton, by way of cross-petition, seeks declaratory judgment as to his rights on his offer to Mutual Tool to sell his shares of Browder Industries and Mt. Sterling Industries which offer was made on October 7, 1968, and Mutual Tool has, ever since, refused and failed to purchase the same. Compton also asked that Mutual Tool be required to redeem the preferred shares of stock of Browder Industries, Inc., in accordance with paragraph 6-B of the contract.
As to the issue made with respect to the purchase of the preferred stock issued by Browder Industries, Inc., this court is of the opinion that parties to a contract cannot impose any legal obligation on one who is not bound by such contract to perform any of its provisions. It would appear that the provisions in the contract designated 6-B are totally void as to Browder Industries, Inc., because it did not enter into nor was it a party to the agreement. Browder Industries, Inc., is still a legal entity. The shareholders of said corporation executed the contract but only in the capacity as shareholders. Therefore, it would appear that a contract executed by the shareholders of a corporation as shareholders cannot bind the corporation. In this case they may not legally enforce the provisions with reference to the redemption of the preferred stock. Furthermore, this court is of the opinion that the redemption of preferred stock may be had only when the corporation has a surplus from which funds may be acquired for such purpose. Gernstenberg, Financial Organization and Management, page 127. The record made herein is void as to evidence of any surplus from the balance sheet of Browder Industries, Inc.
Although the court would further observe that the general corporation law permits the application of the right to redeem to any class or series of shares, the right is usually exercised in connection with preferred shares. R. C. 1701.23. As to the right itself, however, it is always exercisable by the corporation and not by the holders of the redeemable shares. R. C. 1701.23; Ballentine Corporation Revised Edition 509. Holders of typical redeemable shares are shareholders and not creditors of the corporation. Shimmon v. National Screw Tack Co., 18 O. N. P. (N.S.) 569. Mannington v. Hocking Valley Ry. Co., 183 F. 133. The word "redeem" as used in the statute means "repurchase." It is clear, therefore, that a redemption is not permissible when it would give reasonable grounds for believing that the corporation may be unable, or might be rendered unable, to satisfy its obligations and liabilities. Miller v. Ratterman, 47 Ohio St. 141.
Finally, there is no evidence before the court as to the provisions in the articles of incorporation of Browder Industries, Inc., as to the status of the preferred shares, nor is there any evidence before the court of the terms and conditions of the preferred shares as such.
The issues presented as between Jack Browder and Mutual Tool are the sufficiency of Browder's offer to sell his shareholdings and, if found sufficient, what financial statement controls for the purpose of computing the purchase price.
It would appear to be the law that generally, the fact that two or more corporations have officers or agents in common will not, of itself, impute the knowledge gained by such officers while acting for one corporation to another corporation in which they hold office also. Nevertheless, there are circumstances under which the knowledge gained by an officer of one corporation will be carried over and imputed to another corporation. For example, it has been held where a corporation is enjoined from committing a nuisance and its business is taken over by a new corporation formed by the shareholders and officers of the old corporation, the knowledge of the officers of the new corporation who were the officers of the old corporation will be imputed to the new corporation and such corporation will be bound by the injunction issued against its predecessor. Farmers Fertilizer Co. v. Ruh, 7 Ohio App. 430. Here the merger of Browder Industries, Inc., and Mt. Sterling Industries, Inc., with Mutual Tool was accomplished by the officers and majority of shareholders of each incorporation involved and thereafter the officers, directors and shareholders of Mutual Tool ran the entire show. It would appear to this court that under all the special facts and circumstances involved herein, that it would be ridiculous to hold that the offer of Jack Browder to sell his shares, when made, did not come to the attention and knowledge of Mutual Tool. Furthermore, it would appear that Browder Industries, Inc., at the time of the offer was, in fact, an agent of Mutual Tool by reason of Mutual Tool owning sixty-seven per cent of its shares and conducting all its affairs. See also Kroger Grocery Baking Co. v. Butchers Hide Assn., 8 O. N. P. (N.S.) 222; In re Poston Construction Corp., D.C., 115 F. Supp. 323. This court, therefore, holds that the offer to sell by Jack Browder is sufficient to bind Mutual Tool under the terms of paragraph 7 of the contract with respect to written offer to sell.
The next question to determine as between Jack Browder and Mutual Tool is the price to be paid by Mutual Tool for the shares of Jack Browder. There are several balance sheets in evidence and the court finds under all the facts and circumstances that the balance sheets of 1966 and 1968 appertaining to the financial condition of Browder Industries, Inc., and Mt. Sterling Industries, Inc., are audited statements within the meaning and intent of the parties to the contract and as contemplated by the provisions of paragraph 7 of the contract. The court finds further that the 1966 financial statements came into existence on February 8, 1967, and the 1968 financial statements came into existence on June 17, 1968. Jack Browder's offer to sell his shares came to the attention and knowledge of Mutual Tool on May 1, 1968. Therefore, under all the facts and circumstances before this court, the audited statements preceding Jack Browder's offer to sell are the statements of 1966 and which came into being on February 8, 1967.
Donald M. Compton communicated his offer to sell his shares to Mutual Tool on October 7, 1968, and, therefore, the financial audited statements preceding his offer to sell his shares are the 1968 statements which came into being on June 17, 1968.
Wherefore the court declares, orders, decrees and renders judgment herein as follows:
That Donald M. Compton has no rights against The Mutual Tool Die Company by virtue of paragraph 6-B of the agreement of January 9, 1967, and therefore on the issue of the redemption by The Mutual Tool Die Inc., of the preferred shares of Browder Industries, Inc., owned by and in the name of Donald M. Compton, judgment is rendered in favor of the defendant, The Mutual Tool Die, Inc., and against the defendant, Donald M. Compton.
That the court determines that Mutual Tool's obligation under the contract of January 9, 1967, as to Jack Browder, came into being on May 1, 1969, in the sum of $14,679.90 and judgment is rendered in favor of plaintiff, Jack Browder and against defendant, The Mutual Tool Die Company in the sum of $14,679.90 with interest at six per cent from May 1, 1969.
That the court determines that Mutual Tool's obligation under the contract of January 9, 1967, as to Donald M. Compton, came into being on October 7, 1969, in the sum of $10,569.50 and judgment is rendered in favor of defendant, Donald M. Compton and against the defendant, The Mutual Tool Die, Inc., in the sum of $10,569.50 with interest at six per cent from October 7, 1969.
It is further the order of the court that the costs of this action be assessed equally between defendants The Mutual Tool Die, Inc., and Donald M. Compton.
It is so ordered.
Judgment accordingly.