Opinion
No. 19922
Decided January 18, 1928.
Corporations — Subscription to stock — Corporation organized for accepting subscriptions and making calls thereon, when — Withdrawal of subscription exercised too late, when — Corporate organization delayed by Federal Government — Subscriber cannot assert right to withdraw subscription, when.
On June 1, 1917, Clark with forty others signed an agreement to subscribe for stock in a proposed corporation, the agreement reciting that such subscriptions should "become conclusive and binding upon the subscribers hereto" when subscriptions aggregating $150,000 par value had been secured. Subscriptions in excess of that amount were secured. No delay in the formation of the corporation occurred, other than that caused by the Capital Issues Committee of the Federal Government. After securing the approval of the Federal authorities, articles of incorporation were filed with the secretary of state, with a nominal capital, on August 13, 1918, and, with the approval of the Federal authorities, an increase of capital in compliance with the subscription agreement was also filed with the secretary of state on September 4, 1918. On August 20, 1918, (and presumably before receiving Clark's letter of that date withdrawing his subscription) the incorporators appointed one of their number to receive the 10% installment on stock subscribed. Clark refused to pay the same.
Held:
1. That, under the provisions of the Ohio Code, the corporation was organized to the extent of accepting the stockholders' subscriptions and of making calls for 10% thereof. The right of withdrawal claimed under his letter of August 20th was exercised too late.
2. In view of the circumstances then existing, there was no unreasonable delay in the corporate organization on the part of its promoters. The delay was caused wholly by the Federal Government. Clark, by failing meanwhile to withdraw from his subscription agreement, cannot assert that right after the preliminary organization of the corporation has been effected in compliance with the state law and Federal regulations.
ERROR to the Court of Appeals of Cuyahoga county.
Plaintiff in error brought an action in the court of common pleas against Sherman S. Clark seeking to recover the sum of $3,000 which it claimed to be a balance due on a subscription for stock in a corporation to be thereafter organized. This subscription was made on June 1, 1917, and was for a total amount of $5,000.
Clark answered setting forth several defenses. He admits that he signed the subscription paper for the shares of stock on the day mentioned, and alleges that when he did so sign it was within the contemplation of the parties that the corporation would be formed within a reasonable time thereafter. He alleges further that no steps were taken towards its formation until more than a year had elapsed after the subscription was made, and therefore that the corporation was not organized within a reasonable length of time. He alleges that, before the corporation had accepted his subscription offer, he (Clark), on August 20, 1918, by paper writing, withdrew his offer to purchase the stock so subscribed. He also alleges that one Nailler, the promoter of the corporation, failed and neglected to organize the corporation under the terms of the subscription agreement; that on the 18th of April, 1919, there arose a dispute between himself and the corporation about his subscription made on June 1, 1917, and that there was an accord and satisfaction between the plaintiff and the defendant, whereby the former agreed to deliver to the latter 20 shares of preferred stock, of the par value of $100 per share, and 20 shares of the common stock of the same par value, in consideration of the payment of $2,000, and that on the last-named date he (Clark) paid the plaintiff the sum of $2,000 in full payment of his subscription of stock in the plaintiff company; that under this agreement complete settlement was had between the parties of all existing claims and liabilities between them.
The defendant also filed a cross-petition reciting the transaction last referred to, and alleged that the plaintiff agreed to deliver the 20 shares each of preferred and common stock upon the payment of the said sum of $2,000, and that after its payment the defendant requested the delivery of said shares, but the plaintiff refused delivery. He therefore asked in his cross-petition for judgment in the sum of $2,000 against the plaintiff.
The plaintiff filed a reply which is substantially a general denial of the allegations contained in the answer and cross-petition.
At the conclusion of the evidence, after motions for directed verdicts on the petition and cross-petition had been made by counsel for the parties, respectively, the court directed the jury to find a verdict in favor of the plaintiff. A verdict was so rendered and judgment entered in its favor.
The Court of Appeals reversed the judgment of the trial court, giving as a reason therefor the indefinite assignment that the judgment of the trial court was "contrary to law." Thereafter the motion of the plaintiff in error for certification of the cause to this court was allowed. Upon the trial, the testimony developed the following facts:
On June 1, 1917, the defendant Clark signed a paper writing purporting to be an offer to subscribe for 50 shares of preferred stock in a corporation proposed to be organized. The agreement recited that the proposed corporation should have an original authorized capital stock composed of 40,000 common and 2,500 preferred shares, each having a par value of $100. The agreement recited that it was made in "consideration of the subscriptions of the subscribers hereto." So much of that agreement as is pertinent here is contained in the following paragraphs:
"(2) Such subscription shall be binding only if an aggregate or total par value thereof of one hundred and fifty thousand dollars ($150,000) shall be secured, but when such aggregate shall be reached such subscriptions shall thereupon become conclusive and binding upon the subscriber hereto, but the liability of such subscriber hereto is limited to his subscription.
"(3) When such subscriptions to the preferred stock have amounted to an aggregate of one hundred and fifty thousand dollars ($150,000) in par value, the said Nailler shall notify the subscribers hereto thereof, and shall immediately cause the incorporation and organization of the company, as hereinabove set forth, with an original board of directors of seven (7) members, properly chosen, and officers selected by such board."
In pursuance of this agreement, subscriptions for stock in an aggregate par value in excess of $150,000 were secured. This subscription agreement was entered into between the subscribers and one Nailler, who was the owner of secret processes and formulæ for the manufacture of certain products, and the agreement provided that, upon the payment of 25 per cent. of the subscriptions, Nailler was to transfer to the corporation these secret processes and formulæ, and was to enter into a contract for the protection of the company in its use of said formulæ. Nailler also engaged to enter into a contract of employment for the management of production for the period of five years upon such salary as should be agreed upon between him and the board of directors. Contemporaneously with the transfer of these formulæ to the company by Nailler, the latter was to receive 4,000 shares of the common stock, "and, when the subscriptions of the subscribers hereto have been fully paid," Nailler was to issue to each of such subscribers one share of his common stock for each share of preferred subscribed and paid for.
The agreement was made and the early stages of the transaction occurred during the progress of the World War, and at a time when the national government controlled new capital stock issues of corporations. In his endeavor to organize the corporation pursuant to the agreement, Nailler testified on the trial that, after the subscriptions had been secured, he communicated with the Ohio secretary of state, who advised him to take the matter up with the Capital Issues Committee at Washington; that he did this, making various trips to that city personally and other trips accompanied by counsel. He testified that he had several conferences, not only at Washington, but with the local Capital Issues Committee at Cleveland, Ohio. Finally he secured the approval of the Capital Issues Committee at Washington in August, 1918, who recommended the incorporation of the company for a nominal amount only. In compliance with this recommendation, the company was incorporated with an organized capital of $10,000, and on August 13, 1918, articles of incorporation were filed with the Ohio secretary of state. After this was done, the matter was again taken up by the Capital Issues Committee at Washington, and permission was obtained from that source "to go ahead and incorporate the company as enumerated in the subscription agreement." This was done, and on September 4, 1918, the vice president and secretary of the company certified that at a meeting of the stockholders, held August 22, 1918, a resolution of all the stockholders was passed increasing the capital stock in the form and amount provided in the subscription agreement. The amendment to the articles of incorporation increasing such capital was filed with the secretary of state on September 4, 1918. Subsequently certificates of compliance and a dealer's license were obtained from the state commissioner of securities. Meanwhile, between the time of filing the original articles of incorporation on August 13 and the said increase of capital in early September, Nailler wrote a letter to Clark on August 15, 1918, notifying Clark that he (Nailler) was proceeding with the organization of the corporation, that the 25 per cent. installment upon the subscription was payable, and, further, that he (Nailler) had "made tentative but complete arrangements for securing a site, erecting a building, and purchasing equipment." On August 20 Clark answered Nailler's letter, saying that his signature for the purchase of shares was made "with the promise that the company would be organized immediately." Clark further wrote:
"This was five or six months ago. Circumstances would prevent my putting any money in your organization at this time, and I ask you, therefore, to withdraw my name."
Nailler replied on August 22, 1918, advising Clark that his subscription was on file with the others at Washington, that the subscription contract was entered into between the writer, Clark, and forty other subscribers, and declining to cancel Clark's subscription. After organization of the corporation various meetings of its directors were held. On October 14, 1918, February 20, 1919, and again on April 3, 1919, calls were made by the company upon the subscribers to the original agreement for payment of 25 per cent. of the amount subscribed.
Messrs. Davis, Young Vrooman, for plaintiff in error.
Messrs. Dustin, McKeehan, Merrick, Arter Stewart, Mr. L.C. Wykoff and Mr. G.P. Bickford, for defendant in error.
It is evident from the opinion of the Court of Appeals that it reversed the judgment of the trial court because it thought that the cause should have been submitted to the jury. In so deciding, the appellate court overlooked an established rule of procedure heretofore adopted by this court. It appears that, at the close of all the evidence, counsel for both parties moved that the case should be taken from the consideration of the jury, and for judgment in favor of their respective parties. Both motions were overruled, and no request was thereafter made for submission to the jury.
In this aspect of the case, both parties clothed the court with the functions of a jury, and a verdict directed by the trial court should not be set aside unless clearly against the weight of the evidence. First Nat. Bank v. Hayes Sons, 64 Ohio St. 100, 59 N.E. 893; Strangward v. American Brass Bedstead Co., 82 Ohio St. 121, 91 N.E. 988; Nead v. Hershman, 103 Ohio St. 12, 132 N.E. 19, 18 A. L. R., 1419.
The trial court found the disputed issues in favor of the plaintiff below, and entered judgment accordingly.
As he did in the trial court so now in this court Clark, the defendant in error, relies chiefly on the following contentions as giving him immunity from liability on his subscription contract:
(1) On an accord and satisfaction agreed on between him and officers of the company on April 18, 1919, after the corporation had been organized.
(2) That he had withdrawn his offer of subscription, made June 1, 1917, by his letter to Nailler on August 20, 1918. Clark claims that he had the legal right to withdraw his subscription at any time before its acceptance by the corporation.
(3) That, since the agreement of subscription provided that Nailler should "immediately cause the incorporation and organization of the company," and since the company was not organized until more than a year afterwards, the corporation was not organized pursuant to his subscription agreement, and that, if it were, he had a right to withdraw from said agreement if such organization was not completed within a reasonable time, and that he effected such withdrawal by his letter of August 20, 1918.
The first contention, that of accord and satisfaction, has been found by the trial court in favor of the company. Clark relied solely upon the receipts given him by certain officers of the company; except for these receipts, the record nowhere discloses that the company or its officers agreed that his subscription for $5,000 should be canceled or withdrawn. The trial court could well have found upon that feature that no accord and satisfaction was had.
On August 20, 1918, Clark wrote Nailler a letter withdrawing his subscription. It must be noted that his subscription was made in conjunction with some forty other subscribers for the proposed issue of preferred stock. It was a tripartite agreement, between himself, co-subscribers, and Nailler, who was a signatory to the agreement. Nailler was to receive the entire issue of 4,000 shares of common stock, transfer to the company his processes and formulæ, and enter into a contract protecting the company in the employment and use of such processes. Nailler later was to transfer to each sub scriber one share of common for each share of preferred stock subscribed and paid for.
Counsel for defendant in error make the claim that, since this was a conditional offer to subscribe for stock in a corporation to be formed, Clark had a right to withdraw his subscription at any time before the corporate organization was formed and before its acceptance of his subscription.
The general and perhaps the prevailing rule upon that subject is as follows:
"According to the weight of authority, a subscription may be withdrawn at any time before it is accepted by the corporation, whether made before or after the formation of the corporation, for the reason that until such acceptance there is no binding contract, because, until then, there is no agreement and no mutuality of object, and hence no consideration, and, in the case of subscription made before the corporation is formed, for the additional reason that, until it is formed, the other contemplated party to the contract is not yet in existence." 2 Fletcher Cyc. Corp., Section 563, and cases therein cited.
This rule seems to be adhered to in this state. Wallace v. Townsend, 43 Ohio St. 537, 3 N.E. 601, 54 Am. Rep., 829. In other jurisdictions it has been held that a contract of this character cannot be revoked except by consent of all the other subscribers. 2 Fletcher Cyc. Corp., 563, supra, and cases cited.
The principle involved is well stated in 7 Ruling Case Law, p. 223, Section 193, as follows:
"The uniform postulate of all the adjudicated cases is that any subscription to stock in a corporation to be thereafter formed is not and cannot be, from the very nature of the transaction, a complete contract — it is an open proposition — until the actual formation of the corporation; it is merely a continuing offer to take stock upon the condition that the corporation be called into existence, and the fulfillment of which condition works at once, without further act on the part of the subscriber, an implied acceptance and concludes a binding contract. * * * If there is a preliminary subscription, and the corporation is thereafter formed as contemplated, within a reasonable time, the subscribers become shareholders without any further act."
Counsel for Clark claim that, even if no consent of the corporation or its officers was obtained, he had the legal right to withdraw his subscription at any time before the corporate organization was completed, notwithstanding his subscription agreement provided that when the aggregate amount was subscribed his said "subscription shall thereupon become conclusive and binding upon the subscriber thereto." Under these circumstances, conceding Clark's claim, was this organization so far completed on August 20, 1918 (when his letter of withdrawal was written), as to justify a call for a part of his subscription by the incorporators, who had meanwhile effected a preliminary organization and filed the articles of incorporation with the secretary of state?
The articles of incorporation, signed by the incorporators, were filed with the secretary of state on August 13, 1918. On August 15 Nailler, one of the incorporators, wrote Clark that he would be notified when the first installment of subscription was payable. On August 20 Clark wrote Nailler and asked a withdrawal of his name from the subscription. On the same day, and presumably before Clark's letter was received, the incorporators, by resolution, appointed Nailler to receive the first installment of 10 per cent. of the capital stock from the subscribers. The testimony further shows that on the 22d of August at least 10 per cent. of the then authorized capital was paid in. The incorporators knew of the subscription agreement at the time of the incorporation, which recited that the same should become conclusive and binding when the aggregate amount of preferred stock had been subscribed. Pursuant to that agreement the incorporators made the call for the 10 per cent. required to be paid in under the incorporation statutes.
Section 8627, General Code, provides:
"Upon filing articles of incorporation, the persons who subscribed then * * * shall be a body corporate, with succession, power to sue and be sued, contract and be contracted with."
Section 8629, General Code, provides:
"A copy of articles of incorporation so filed, and duly certified by the secretary of state, shall be prima facie evidence of the existence of the corporation therein named."
Section 8632, General Code, provides that 10 per cent. on each share subscribed shall be payable at the time of making the subscription, and the residue paid in as the directors require.
Section 8633, General Code, provides:
"When ten per cent. of the capital stock is subscribed, the subscribers to the articles of incorporation, or a majority of them at once shall so certify in writing to the secretary of state."
These various sections relating to the preliminary Organization of corporations connote the duty of making a call for the first installment of 10 per cent. of the subscription, and the of certifying to the secretary of state that 10 per cent. of the capital has been subscribed. Not only had the preliminary organization been effected five days previous to Clark's letter of withdrawal, but it is obvious from the evidence that calls by the incorporators were made before the letter of withdrawal could have been received by them.
While it has been held that in a proceeding in quo warranto the mere filing of articles of incorporation does not make a company an incorporated one, capable of carrying on an insurance business, until the requisite stock has been subscribed and directors chosen ( State, ex, rel., v. Insurance Co., 49 Ohio St. 440, 31 N.E. 658, 16 L.R.A., 611, 34 Am. St. Rep., 573), we are of opinion that, under the various sections of our corporation Code, "the persons who subscribe" the articles are endowed with the functions of a "body corporate," upon whom devolves the duty of collecting the 10 per cent. subscriptions to the capital stock which the incorporators must certify to the secretary of state. Alluding to statutes of similar import, White, J., in Ashtabula New Lisbon Rd. Co. v. Smith, 15 Ohio St. 328, 334, classified the general powers of a corporation into two classes — one to be exercised before, the other after, the election of directors. "Among the former is the right to receive subscriptions to the capital stock, and, when 10 per centum of the amount shall be subscribed, to elect directors; * * * but, the existence of the body corporate does not depend upon the election of, or the right to elect, directors." This is the feature of the corporate organization applicable to the instant case. The same principle is supported in Oregon Central Rd. Co. v. Scoggin, 3 Or. 161.
Therefore, conceding the legal claim made by Clark that he could withdraw his subscription prior to the organization of the corporation, we are of opinion that, under the circumstances, and under the terms of his subscription, his withdrawal came too late unless he had the right to do so because Nailler did not "immediately cause the incorporation and organization of the company," etc. In his letter of August 20 Clark did not complain of defect in organization, but relied solely on his insistence that the company was not organized immediately, within the terms of his subscription agreement. As to his contention that the organization was unreasonably delayed, it may be said on that issue that the trial court found against him. The subscription of Clark and his co-subscribers was made during the existence of the World War. It is not disputed that those who had charge of the formation of the corporation did all they possibly could to effect an immediate organization, but were prevented from so doing by the action of our federal government. Clark was presumed to know of these federal regulations, and, had he desired to withdraw his subscription during the period when the Capital Issues Committee had the matter under advisement, he should have exercised his claimed right of withdrawal in the interim and not have waited until after that committee had given its approval of the corporate formation, and until after its preliminary organization was completed and certified to the secretary of state. We attach but little importance to Clark's claim that the subscription agreement was not complied with because of the fact that its original capital, under government orders, was less than the proposed capital provided for in the subscription agreement. The evidence discloses that the whole transaction contemplated the increase of capital under government supervision and order, and it was increased, in conformance with the subscription agreement, on September 4, 1918, by filing the certificate of increase with the secretary of state.
Since the disputed facts were found in favor of the plaintiff by the trial court, after each party had submitted the case to it, the Court of Appeals erred in holding that there was any issue in the case which should have been submitted to the jury. The judgment of the Court of Appeals is reversed, and that of the Common Pleas affirmed.
Judgment of the Court of Appeals reversed and that of the Common Pleas affirmed.
MARSHALL, C.J., DAY, ALLEN, KINKADE, ROBINSON and MATTHIAS, JJ., concur.