Brinkley, Marshall B.

English

Louisiana State University: DigitalCommons @ LSU Law Center

Louisiana Law ReviewVolume 25 | Number 4June 1965Corporate Law - Restrictions on Alienability ofStockMarshall B. BrinkleyThis Note is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted for inclusionin Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact kreed25@lsu.edu.Repository CitationMarshall B. Brinkley, Corporate Law - Restrictions on Alienability of Stock, 25 La. L. Rev. (1965)Available at: https://digitalcommons.law.lsu.edu/lalrev/vol25/iss4/10LOUISIANA LAW REVIEWthe other hand, the court reasoned that plaintiff should becharged with the effects of administrative delays in servicewhen the suit is filed in a court of incompetent jurisdiction,since he has the choice of the forum. Consequently, when aplaintiff chooses a forum of incompetent jurisdiction or improp-er venue, he should be required to bear the consequences of anyadministrative delays in service of citation.13It is submitted that this decision was necessary and properin the interest of efficient judicial administration. There is nodoubt that the effects of the accrual of prescription can beharsh, as demonstrated by the instant case. On the other hand,prescription serves to prevent defendants from being harassedby long-delayed suits and suits with no foundation which arepurposely delayed, so that evidence will be lost and the defend-ant encouraged to settle his case without going to trial. Whenviewed in this light, it appears that the court was wise in notrelaxing the strict rules governing the interruption of prescrip-tion. In the future, in order to avoid a plea of prescription frombeing sustained when federal jurisdiction is uncertain, it wouldbe prudent for plaintiff's attorney to verify the service of cita-tion before the end of the prescriptive period. As an alternative,filing the suit in both the federal court and the state courtwithin the prescriptive period would insure preservation of theplaintiff's cause of action; however, this latter procedure ismore expensive for the plaintiff, and duplicate filing is scarcelyconducive to efficiency and economy in judicial administration.Charles S. McCowan, Jr.CORPORATE LAW - RESTRICTIONS ONALIENABILITY OF STOCKFour non-stockholders desired to purchase a controllinginterest in a corporation from defendant, a majority share-holder. The articles of incorporation contained the followingrestriction on the alienability of stock: before sale of stock to13. This reasoning is in accord with the jurisprudence. See Conkling v. Loui-siana Power & Light Co., 166 So.2d 68 (La. App. 4th Cir. 1964) ; Knight v. Loui-siana Power & Light Co., 160 So.2d 832 (La. App. 4th Cir. 1964) ; Hidalgo v.Dupuy, 122 So.2d 639 (La. App. 1st Cir. 1960) ; Flowers v. Pugh, 51 So.2d 136(La. App. 1st Cir. 1951).926 [Vol. XXVNOTESany outsider, a thirty-day period must elapse during which theremaining shareholders can purchase the stock offered for sale,proportionally to their interests in the corporation.' Defendantnotified the secretary of the corporation, who was a shareholder,of his intention to sell. The secretary duly informed the otherstockholders. The secretary then demanded that defendant sellto her a proportionate share of the stock to be sold. No othershareholder made a similar offer within the prescribed thirty-day period. But since the four non-shareholders insisted onpurchasing the entire block offered for sale, defendant refusedto comply with the secretary's demand, and sold his entire con-trolling interest to the four non-shareholders. The block wouldnot have been a controlling interest if the secretary had pur-chased a proportion. In an action by the secretary to set asidethe sale, the trial court held the transfer to the non-stockholdersvalid. The Third Circuit Court of Appeals affirmed. Held, astock restriction permitting shareholders to purchase propor-tionate shares of the stock to be sold by another shareholder doesnot give an individual shareholder the right to purchase merelyhis proportionate amount of the selling shareholder's block ofstock when other shareholders evidence no desire to purchasethe remainder. Phillips v. Newland, 166 So. 2d 357 (La. App.3d Cir. 1964), cert. denied, 167 So. 2d 679 (La. 1964).It is now well settled throughout the United States that rea-sonable restrictions may be imposed on the shareholder's rightto transfer his stock.2  Restrictions may be imposed by thearticles of incorporation, the by-laws, or by an independentshareholder's agreement.3  Additionally, the Uniform Stock1. Pertinent parts of the instant restriction read as follows: "In the event anyholder or holders (sic) of common stock of this corporation should desire to sellsuch common stock, or any portion thereof, such stock shall be first offered tothe stockholders of record . . . and the stockholders of record shall be entitled topurchase such proportionate shares of the stock offered . . . as corresponds withtheir respective stockholdings . . . . [T]he stockholder shall be granted a periodof thirty (30) days within which to accept or reject, in whole or in part, theoffer of such stock. . . . [I]t is stipulated and provided that the common stock ofthis corporation shall not be sold to non-stockholders whenever there be a stock-holder . . . of record desirous of purchasing said stock . . . at the same price whichmay have been offered by non-stockholders." 166 So. 2d at 359-60.2. See, e.g., Guaranty Laundry v. Pulliam, 198 Okla. 667, 181 P.2d 1007(1947) In re Garvin's Estate, 335 Pa. 542, 6 A.2d 796 (1939) ; Ireland v. GlobeMilling Co., 21 R.I. 9, 41 Atl. 258 (1898) ; BALLENTINE, CORPORATIONS § 336(1946) FLETCHER, CYCLOPEDIA CORPORATIONS §§ 5452-5453 (1957) ; STEVENS,CORPORATIONS § 129 (2d ed. 1949).3. See note 2 supra. See generally Annots., 65 A.L.R. 1159 (1930) ; 138 A.L.R.647 (1942), 61 A.L.R.2d 1318 (1958). The Uniform Stock Transfer Act requiresthat the purchaser be put on notice of such restrictions by having the restrictionon the stock certificate. UNIFORM STOCK TRANSFER ACT § 15.1965]LOUISIANA LAW REVIEW [Vol. XXVTransfer Act requires that the stock restriction must appear onthe stock certificate to bind purchasers. 4 Since most courts andthe majority of writers treat corporate stock as the personalproperty of the stockholder, 5 there is a presumption that suchpersonal property may be alienated at will in the absence of aclear and binding restriction to the contrary." Such restrictions,although valid if reasonable, will generally be strictly construed. 7In adopting the Uniform Stock Transfer Act,8 Louisiana hasimpliedly taken the position that restrictions on the alienabilityof stock are valid. This implication arises from section 15 ofthe Uniform Act, which states that stock restrictions mustappear on the stock certificate.9 Similarly, La. R.S. 12:3(6)provides that restrictions on stock must appear in the articles ofincorporation.' Nevertheless, prior to the instant decision thequestions whether such restrictions were valid and whether therule of strict construction would be followed in this jurisdictionhad not been settled by the courts.1Restrictions on the alienability of corporate stock which givethe remaining stockholders the option to purchase any sellingstockholder's shares, are generally held valid, so long as the re-strictions are imposed in accordance with statutory procedures,and are not unreasonable.' 2 Although no American cases have4. The Uniform Stock Transfer Act imposes this requirement at § 15. Prac-tically all states have adopted the act. See 6 UNIFORM LAWS ANNOTATED 7(Supp. 1964).5. See, e.g., Howe v. Roberts, 209 Ala. 80, 95 So. 344 (1923) ; TippecanoeCounty v. Reynolds, 44 Ind. 509, 15 Am. Rep. 245 (1873) ; Bloomingdale v.Bloomingdale, 107 Misc. 646, 177 N.Y. Supp. 873 (Sup. Ct. 1919) ; FLETCEEB,CYCLOPEDIA CORPORATIONS § 5453 (1957).6. See note 5 supra. Restrictions are justified on the basis of contract amongthe shareholders, or simple corporate regulations. See note 3 8upra.7. See, e.g., Oakland Scavenger Co. v. Gandi, 51 Cal. App. 2d 69, 124 P.2d143 (1942) ; McDonald v. Farley & Loetschek Mfg. Co., 226 Iowa 53, 283 N.W.261 (1939) ; Guaranty Laundry v. Pulliam, 198 Okla. 667, 181 P.2d 1007 (1947).8. LA. R.S. 12:521-543 (1950).9. Id. 12:538.10. See also id. 12:29B(9) stating that restrictions may be in the by-laws.Most writers agree that to be perfectly safe, the restriction ought to appear onthe stock certificate, in the articles of incorporation, and in the by-laws. Seenote 2 supra.11. See State ex rel. Scott v. Caddo Rock Drill Bit Co., 141 La. 353, 75 So. 78(1917) (holding the provision inapplicable) ; Bartlett v. Fourton, 115 La, 26, 38So. 882 (1905) (conceding arguendo that the provision was valid) ; CrescentCity Seltzer & Mineral Water Mfg. Co. v. Deblieux, 40 La. Ann. 155, 3 So. 726(1888) (restriction not applicable in case of pledge). State ex rel. Cabral v.Strudwick Funeral Home, Inc., 4 So.2d 760 (La. App. Orl. Cir. 1941) (restrictionnot applicable). See generally Note, 4 LA. L. REV. 441 (1942).12. See note 2 supra. See also, e.g., Sterling Loan & Inv. Co. v. Litel, 75 Colo.34, 223 Pac. 753 (1924) ; In re Feldstein's Estate, 25 Pa. Dist. R. 602 (1916) ;NOTESbeen discovered which deal with the precise issue of the instantcase, the Ohio case of Menke v. Gold Metal Oil Co.'8 indicatesthat a restriction which clearly gives the remaining shareholdersan individual right to purchase a proportion of a selling share-holder's stock will be enforced, each shareholder having a rightto part of the stock regardless of any other shareholder's de-sires.14 However, in the Ohio case, unlike the instant case, theprovision was expressly drawn to confer on each stockholder thisindividual right. Moveover, the English case of Ocean Coal Co.v. Powell Coal Co.,15 a restriction similar to the instant one, washeld not to confer on the shareholders any right to purchase onlya part of the offered stock.'0In the instant case the plaintiff argued that the restriction inquestion required the selling shareholder to sell a proportionateamount of his stock to all offering shareholders irrespective ofwhether the stockholders were willing to purchase the entireamount offered. The defense urged that the plaintiff's offerwas really a counter-offer, and not an acceptance, to his originalproposal. In rejecting plaintiff's contentions, the court ac-cepted, without comment, the well-established principles of corp-orate laws that "the law favors unrestrained transferability ofstocks and restraints on alienability must be strictly con-strued."'1 7 Adopting the defendant's counter-offer theory, thecourt argued that the instant restriction only gave the othershareholders the right to purchase "at the same price which mayhave been offered by non-shareholders,' 8 an impossibility whenthe shareholder or shareholders are unwilling to purchase theentire amount offered. Although this position is subject to thecriticism that the words "at the same price" might refer to theprice per share, the court's interpretation seems consistent withthe policy of unrestrained transferability: in effect, the courtMoses v. Soule, 63 Misc. 203, 118 N.Y. Supp. 401 (1909), aff'd, 136 App. Div.904, 120 N.Y. Supp. 1136.13. 47 Ohio App. 180, 191 N.E. 472 (1933).14. "It is agreed by the holder of the within shares of stock . . . that he willnot dispose of any of the shares . . . without first offering the same . . . to theother shareholders of the Company of the same class, to each, that number ofshares . . . which is proportional . . . to the number already held." Id. at 181,191 N.E. at 473. (Emphasis added.)15. 1 Ch. 654 (1932).16. "In my judgement the offer is not accepted within the meaning of thearticle unless one or more members agree to take up the whole number offered."Id. at 662.17. 166 So.2d at 360. See 18 C.J.S. Corporations § 391 (1939).18. See note 1 supra.1965]LOUISIANA LAW REVIEWgave every benefit to the selling shareholder. Particularly, thecourt was unwilling to preclude the defendant from selling hiscontrolling interest as a block when a less restrictive interpreta-tion was available.' 9Thus, while the instant case only assumes the validity ofrestrictions on the alienability of stock,20 it increases the likeli-hood that such restrictions will be accepted in Louisiana. More-over, the case clearly aligns Louisiana with the majority positionthat such restrictions will be strictly construed.Marshall B. BrinkleyINCOME TAX - TAXABLE INCOME- CONTRIBUTIONS OF SERVICEAND PROPERTY TO CORPORATIONAppellee, a geologist, agreed with others in a partnership tolook for and buy potentially productive oil and gas properties inreturn for a monthly drawing salary and expenses and a part-nership interest in the properties after the others recoveredtheir costs. The arrangement proved successful, and when itbecame evident that costs would be recovered, the original agree-ment was terminated and all the oil and gas properties that hadbeen acquired were transferred to a newly-formed corporation.Appellee received 13% of the stock but included no part of thevalue of the stock in his income tax return for that year.' TheCommissioner ruled that the fair market value of the stockshould have been included in gross income and assessed a defi-19. 166 So.2d at 360: "To uphold plaintiff's position would be to put Newlandin a position where he would be unable to sell a controlling interest in the corpo-ration."20. The court in the instant case, 166 So.2d at 360, states that "restrictionsare valid under Louisiana law," citing State em rel. Scott v. Caddo Rock DrillBit Co., 141 La. 353, 75 So. 78 (1917). The Scott case, however, expressly avoidedruling upon the validity of the provision in question. Id. at 359, 75 So. at 80.1. The facts in the court of appeal opinion are stated very briefly, but ac-cording to the district court opinion it appears that from February 9, 1951,through March 31, 1955, the partnership advanced capital in the sum of $1,245,106and recovered from oil and gas production on the properties the sum of $1,008,613.The partnership expected the properties to be paid out by November 30, 1955,and accordingly the corporation was formed to which were transferred all theproperties acquired through the efforts of appellee under the agreement, witheach party receiving "shares of stock in the corporation proportionate to hisrespective interest in the properties." Frazell v. United States, 213 F. Supp. 457,460 (W.D. La. 1963). The 13% stock interest of appellee in the newly-formedcorporation was determined to have a fair market value of $91,000.[Vol. XXV

Corporate Law - Restrictions on Alienability of Stock

https://digitalcommons.law.lsu.edu/cgi/viewcontent.cgi?article=3706&amp;context=lalrev

Corporate Law - Restrictions on Alienability of Stock

Abstract

Similar works

Full text

Available Versions

Louisiana State University: DigitalCommons @ LSU Law Center