Opinion
No. 75-301
Decided March 11, 1976. Rehearing denied March 25, 1976.
In action to oust board of directors of corporation organized for sale of water, plaintiffs appealed from summary judgment in favor of defendants.
Affirmed
1. CORPORATIONS — Non-Profit — Board Powers — Issuance of Stock — Water Company — Statute. Where a corporation was organized as a non-profit corporation and recognized by the Secretary of State as accepting the provisions of the Colorado Non-Profit Corporation Act, the inclusion of broad powers in the articles of incorporation did not defeat the non-profit nature of the corporation by statutory provision, such powers being consonant with those permitted by the act.
2. Non-profit — Prohibition — Issuance of Stock — Exception — Water Companies — Defendant's Status — Unchanged. Since, by statute, water companies are specifically excepted from the rule prohibiting issuance of shares of stock, defendant corporation's issuance of stock did not change it from a non-profit to a for-profit corporation.
3. Non-Profit Corporation — Distribution of Income. To determine whether a corporation is "non-profit," the basic question to be answered is whether the corporation is being exploited for direct monetary gain.
4. Defendant — Business Activities — Trading in Shares — No Distribution of Profit — Statutory Test — Non-Profit Corporation. Although the defendant corporation has repurchased its own stock, competes with other corporations for the sale of water, and has an "earnings" and stockholder's equity, and although there are numerous stockholders who trade actively in its shares, the record discloses that no income or profit of the corporation is distributed to its stockholders; hence, the corporation meets the statutory test of being a non-profit corporation.
Appeal from the District Court of Jefferson County, Honorable Roscoe Pile, Judge.
Elias J. Candell, for plaintiffs-appellants.
Henry, Cockrell, Quinn Creighton, Richard C. Cockrell, Peter J. Wiebe, Jr., Edward L. Lemons, for defendants-appellees.
Division II.
This is an action in the nature of quo warranto and mandamus pursuant to C.R.C.P. 106 in which plaintiffs, unsuccessful candidates for the board of directors of defendant corporation, sought to oust the individually named defendants as directors. Both parties moved for summary judgment, and the defendants' motion was granted. We affirm.
The essence of plaintiffs' claim is that a corporate bylaw authorizing directors' terms of six years is illegal. See § 7-5-102, C.R.S. 1973. Both parties agree that the validity of this contention depends on whether the company is a nonprofit corporation or an ordinary business corporation. If it is the former, the six-year bylaw provision, under which defendants hold their offices, is valid because the Colorado Nonprofit Corporation Act, § 7-20-101 et seq., C.R.S. 1973, does not contain a limitation on the duration of directors' terms of office.
Defendant corporation was organized in 1926 as a nonprofit corporation. In 1969 it filed its election to accept the provisions of the Colorado Nonprofit Corporation Act, and the Secretary of State recognized that election and issued a Certificate of Acceptance. Plaintiffs contend, however, that powers of a commercial or business nature contained in the articles of incorporation and certain corporate acts destroyed the nonprofit aspects of the corporation and thereby made it a corporation for profit. They also urge that a "finding" in a prior action, that the corporation was organized under the general corporations statute, is "res judicata" on the issue of the corporation being for profit. We find these contentions unpersuasive.
I.
[1] In urging the for-profit nature of the corporation, plaintiffs first point to the objects and purposes section of the defendant corporation's original articles of incorporation. This section empowers the corporation:
"(d) To erect houses and buildings of any and every kind, and to maintain the same, and to sell, lease or in any manner dispose of the same, or any of them, or any part thereof, or interest therein;
. . . .
"(f) To purchase stock of other incorporated companies, and to acquire the good-will, rights, property and assets of all kinds, and to undertake the whole or any part of the liabilities of any person, firm. . . ."
. . . .
"(h) To enter into, make, transfer and carry out contracts of every sort and description;
. . . .
"(j) This corporation is purely mutual and is not organized for pecuniary profit;
"(k) The Company shall furnish water to its stockholders. . . . The Company may also furnish light and power on the same basis;
"(l) The Company shall have the right to purchase its own capital stock, but not to impair its capital in so doing. . . ." (emphasis supplied)
Broad though these powers may be, we conclude that they are consonant with those permitted by § 7-22-101, C.R.S. 1973.
[2] Section 7-24-110, C.R.S. 1973, is fully determinative of plaintiffs' contention that issuance of stock changes the essence of this corporate entity from nonprofit to profit. By that statutory provision, water companies, like the defendant corporation, are specifically excepted from the rule prohibiting the issuance of shares of stock.
II.
Plaintiffs next urge that the type of business activities engaged in by the defendant corporation destroyed its nonprofit status. Specifically, in this regard, plaintiffs point to the defendant corporation's acts of repurchasing its own stock, the fact that there are 25,000 stockholders who actively trade their shares, that the corporation competes against other water organizations for the sale of water, and that it has "earnings" and a stockholders' equity.
Here, too, the statute is dispositive of plaintiffs' contentions. By § 7-22-101(q), C.R.S. 1973, a nonprofit corporation is empowered:
"To have and exercise all powers necessary or convenient to effect any or all of the purposes for which the corporation is organized."
[3,4] The only statutory limitation on a nonprofit corporation's activities potentially applicable here is found in § 7-20-102(10), C.R.S. 1973, which provides that "no part of the income or profit of [a nonprofit corporation] is distributable to its members, directors, or officers . . . ." Thus, to determine whether a corporation is "nonprofit," the basic question to be answered is whether the corporation is being exploited for direct monetary gain. See 1 W. Fletcher, Cyclopedia of the Law of Private Corporations § 68 (M. Wolf 1974 rev.). The record discloses that no income or profit of defendant corporation is distributed to its members, and thus it meets the narrow test established by the statute of being a nonprofit corporation.
III.
Plaintiffs' final contention is that the doctrine of res judicata establishes that the defendant corporation is a general corporation for profit. This argument is based on the fact that in a prior action by defendant corporation and its then directors against certain stockholders following a proxy fight, the stockholders filed a counterclaim against the directors alleging, inter alia:
"Plaintiff is a consolidated corporation organized under Colorado statutes as 'purely mutual' and 'not for pecuniary profit' . . . but in substance is a corporation for profit."
In its judgment in that case, the trial court stated the following:
"The Court, by way of observation, believes that this corporation was organized under the General Corporation Act, even though it is a nonprofit corporation." (emphasis supplied)
Plaintiffs' reliance on the dictum of the court in the prior action is misplaced. As found by the trial court in the instant case, these comments were made relative to the status of the corporation before it qualified under the new Colorado Nonprofit Corporation Act. Thus, even if the corporation had been properly delineated in the prior action as being governed by the General Corporation Act, that is no longer the case.
Judgment affirmed.
JUDGE ENOCH and JUDGE RULAND concur.